The Greeks: Forces That Move Options

Lesson 2: The Greeks

Options don't just go up and down with the stock. They have their own physics โ€” five forces called "The Greeks" that determine how an option's price moves. Understanding these is the difference between gambling and trading.

Why They Matter: You can be right about the stock's direction and still lose money if the Greeks work against you. The Greeks explain how you make or lose money.
ฮ”

Delta (ฮ”) โ€” Directional Exposure

What it measures: How much the option's price changes for a $1 move in the underlying stock.

Range: 0 to 1.0 for calls, -1.0 to 0 for puts.

WSB Translation: "How many shares this option acts like." A 0.50 delta call gains ~$0.50 for every $1 the stock rises.

Key facts:

  • Deep ITM options โ†’ delta near ยฑ1.0 (basically stock)
  • ATM options โ†’ delta near ยฑ0.50 (coin flip)
  • Deep OTM options โ†’ delta near 0 (lottery tickets)
  • Delta also roughly estimates probability of expiring ITM
ฮ“

Gamma (ฮ“) โ€” Acceleration

What it measures: How much delta itself changes for a $1 move in the stock. The rate of change of delta.

WSB Translation: "How fast your position accelerates in your favor โ€” or against you."

Key facts:

  • Highest for ATM options near expiration
  • Low for deep ITM or deep OTM options
  • Long gamma = delta increases as the stock moves your way (positive feedback)
  • Short gamma = delta moves against you as the stock moves (negative feedback โ€” dangerous!)
ฮ˜

Theta (ฮ˜) โ€” Time Decay

What it measures: How much value the option loses each day as expiration approaches. Always negative for option buyers.

WSB Translation: "The rent you pay to hold this position overnight. Every. Single. Day."

Key facts:

  • Accelerates as expiration approaches (the "theta curve" is exponential)
  • Highest for ATM options
  • Buyers hate theta; sellers love it
  • Last 30 days before expiry: brutal decay. Last week: absolutely savage.
ฮฝ

Vega (ฮฝ) โ€” Volatility Sensitivity

What it measures: How much the option's price changes for a 1% change in implied volatility (IV).

WSB Translation: "How much this option pumps when the stock gets crazy."

Key facts:

  • Highest for ATM options with longer time to expiration
  • Buying options when IV is low, selling when IV is high = the edge
  • Earnings plays are vega plays โ€” IV crushes after the announcement (IV crush)
  • Long vega = you want volatility to spike. Short vega = you want calm.
ฯ

Rho (ฯ) โ€” Interest Rate Sensitivity

What it measures: How much the option's price changes for a 1% change in the risk-free interest rate.

WSB Translation: "The one Greek nobody cares about unless you trade LEAPS or work at a hedge fund."

For retail traders with short-dated options, rho is negligible. For LEAPS (1+ year options), it starts to matter. Higher rates โ†’ calls more expensive, puts cheaper.

Greek Cheat Sheet

PositionDeltaGammaThetaVega
Long Call++โˆ’+
Short Callโˆ’โˆ’+โˆ’
Long Putโˆ’+โˆ’+
Short Put+โˆ’+โˆ’
Practical Example: You buy an ATM SPY call expiring in 7 days for $2.00. Delta is 0.50, theta is -$0.15/day. SPY goes up $1 today โ†’ you gain $0.50 from delta. But theta took $0.15. Net: +$0.35. Next day SPY is flat โ†’ you just lose $0.15 to theta. This is why timing matters.

๐Ÿง  Knowledge Check

1. You buy an OTM call with 3 days until expiration. Which Greek is your biggest enemy?

2. IV Crush after earnings primarily destroys which Greek?

3. A deep ITM call has a delta near what value?

Further Reading