Delta
A shadow of the stock, it moves in part, A 0.30 chance to win the heart. It measures speed, the first to see, And proxies a probability.
Intuition
Delta is the 'speed' of the option. It measures how much the option's price will change for every $1 move in the underlying stock. It's also used as a rough 'probability' of the option expiring in-the-money (ITM).
- Ranges from 0 to 1.0 for calls, and -1.0 to 0 for puts.
- An 'at-the-money' (ATM) option usually has a Delta of ~0.50 (or -0.50 for puts).
- Deep 'in-the-money' (ITM) options behave like stock, with a Delta near 1.0 (or -1.0).
- Far 'out-of-the-money' (OTM) options barely move, with a Delta near 0.
Trading Applications
Used for directional bets and hedging. The 'position delta' of your portfolio tells you your overall directional exposure, as if it were shares of stock.
- Buying a 0.70 delta call is a strong bullish bet, similar to owning 70 shares of stock per contract.
- Traders create 'delta-neutral' positions by balancing positive and negative deltas to 0. This removes directional risk, allowing them to trade volatility (Vega) or time decay (Theta) instead.
- Position Delta = (Delta of Option 1 * # of Contracts * 100) + (Delta of Option 2 * ...)
Gamma
The delta's change, the risk that's coiled, Where neutral plans are quickly spoiled. A positive arc, the move you ride, A negative pit, where sellers hide.
Intuition
Gamma is the 'acceleration.' It measures how much your Delta will change for every $1 move in the stock. It's the 'risk' in a delta-neutral position and represents the *instability* of your hedge.
- Gamma is highest for at-the-money (ATM) options.
- Gamma is also highest for options very close to expiration. This 'gamma risk' can cause wild, last-minute price swings.
- Option buyers are 'long gamma' (positive), meaning their deltas improve in their favor as the stock moves.
- Option sellers are 'short gamma' (negative), meaning their deltas get worse as the stock moves against them.
Trading Applications
Gamma dictates how often a neutral trader must re-hedge. 'Long gamma' profits from large, fast moves, while 'short gamma' profits from a stable stock.
- Long Straddles/Strangles are 'long gamma' plays. You buy both a call and a put, betting on a large move in *either* direction.
- Sellers (like Iron Condor traders) are 'short gamma.' They face significant risk if the stock makes a sudden, large move, as their losses will accelerate.
- 'Gamma scalping' is an advanced strategy where a trader stays delta-neutral by repeatedly buying/selling stock against their long-gamma position as the price oscillates.
Theta
An ice cube sits on a summer stone, A slow decay, a daily drone. It melts at noon, a frantic pace, The seller's friend, the buyer's race.
Intuition
Theta is 'time decay.' It's the 'ice cube melting'—the amount of value an option loses each day just from the passage of time, assuming all else stays the same.
Theta Decay Curve
Value decays slowly, then accelerates rapidly in the last 30-45 days.
- Theta is almost always a negative number for a single option, as time only moves forward.
- This decay is not linear; it accelerates exponentially as the option nears its expiration date.
- ATM options have the highest Theta because they have the most 'time premium' (extrinsic value) to lose.
- ITM and OTM options have lower Theta, as they have less extrinsic value.
Trading Applications
Theta is the primary profit engine for option sellers. It's the daily 'rent' they collect. For buyers, Theta is the enemy—the clock is always ticking against them.
- Strategies like Covered Calls, Credit Spreads, and Iron Condors are 'positive theta' plays. The goal is to let time pass and have the options expire worthless.
- A 'Theta/Gamma' tradeoff exists: positions with high positive Theta (selling) usually have negative Gamma (risk).
- Calendar Spreads are a way to 'buy' and 'sell' theta at the same time, selling a short-term option (high decay) and buying a long-term option (low decay).
Vega
The price of fear, the cost of doubt, When panic reigns, the premiums sprout. It's not a Greek, this star of night, But measures the unseen, volatile light.
Intuition
Vega measures the 'price of fear'—an option's sensitivity to a 1% change in Implied Volatility (IV). It tells you how much the option price will change if the *market's expectation* of future movement changes.
- Implied Volatility (IV) is different from historical volatility. It's the 'fear' or 'uncertainty' premium priced into the option.
- IV is often mean-reverting: it spikes during panics (e.g., earnings, market crashes) and falls during calm periods.
- Options are more expensive when IV is high, and cheaper when IV is low.
- Longer-dated options have higher Vega, as there's more time for volatility to have an impact.
Trading Applications
Traders buy options ('long vega') when they expect volatility to increase, and sell options ('short vega') when they expect it to fall.
- A classic 'short vega' trade is selling options before a company's earnings report, betting on the 'IV crush'—the rapid drop in volatility *after* the news is released.
- A 'long vega' trade might be buying options when the market is very calm, believing a big move is coming soon.
- Straddles and Strangles are 'long vega' and 'long gamma,' making them pure bets on a large move and an increase in volatility.
Rho
The cost to carry, the rate unseen, The slowest Greek, on LEAPS it's keen. It helps the call, it hurts the put, A boring number, but it stays afoot.
Intuition
Rho measures the option's sensitivity to a 1% change in interest rates. It's the 'cost to carry' the position and is generally the least impactful greek for most traders.
- Rho is positive for calls: higher interest rates make calls slightly more valuable. (It's more expensive to *own* stock, so the *option* to buy becomes more attractive).
- Rho is negative for puts: higher interest rates make puts slightly less valuable. (You earn more interest on the cash you've set aside to buy the stock, offsetting the put's value).
- Its effect is tiny on short-term options but becomes noticeable on LEAPS (long-term options).
Trading Applications
99% of retail traders ignore Rho. Its impact is tiny compared to Delta, Gamma, Theta, and Vega. It's only a consideration for very long-term strategies or large institutional portfolios.
- If you are trading LEAPS (options 1-2+ years out), a significant change in Fed interest rate policy could have a small but measurable impact on your position.
- It's primarily a risk factor for market makers and large funds managing complex, long-dated portfolios.