2 Options Greeks for Next-Level Traders
Even though options trading may seem complicated to new traders, Joseph Burgoyne, Director, Institutional and Retail Marketing, for The Options Industry Council, provides helpful guidance to understanding options pricing.
To be a successful options investor, it’s important to understand how options prices move and what causes those moves. All too often, new options traders are left baffled as to why an options contract languishes while its underlying stock takes off. Thankfully, guidance can be found in pricing models and the Greeks. Simply stated, the Greeks are a group of mathematical models that each help to calculate the theoretical value of an option. Here we will introduce two of the Greeks, delta and theta.
There is not necessarily a direct linear relationship between an option’s value and the price of the underlying equity. As such, each option has a delta that describes the theoretical relationship between the two. Delta expresses how far the value of an option is likely to move based on a $1 move in the price of the underlying stock, and is expressed as a range between zero and 1.00. The higher the delta, the closer the price moves of the option will mimic those of the underlying. For example, if an option has a delta of .90 and the underlying moves $1, then the option contract would move $0.90, barring no other factors.
A helpful illustration for the concept of delta is an adult walking with a child.