Factors that Affect Option Prices – The Option “Greeks”

The option prices quoted in an option chain are AFFECTED by 5 factors and collectively these factors are called the option greeks.  They allow a trader to calculate changes in the value of an options price with respect to a change in the value of the underlying.

Option Greeks

• delta - measures change in an option’s value due to a $1 change in the underlying;
• gamma - measures change in delta with respect to the underlying;
• theta - measures change in an option’s value due to the passage of one day;
• vega - measures change in an option’s value due to a 1.00% change in volatility;
• rho - measures change in an option’s value due to a 1.00% change in interest rate.

The greeks may look complicated, but they are very simple once you are able to understand them.  Think about this for a second – the option greeks allow you to calculate exactly how your position will perform regardless of how the underlying (i.e. stock, ETF, index, etc.) may move.  This is the beauty of the greeks!!

Look for additional posts under the Options 101 category for a detailed discussion on each of the option greeks mentioned above.