“Greek symbols are widely used in financial markets, particularly in options trading, to represent various measures of risk and sensitivity associated with option contracts. These symbols help traders and investors understand how the price of an option may change in response to changes in underlying variables. Here are some of the key Greek symbols used in options trading:
Delta (Δ): Delta represents the sensitivity of an option’s price to changes in the underlying asset’s price. It measures the rate of change of the option price with respect to a $1 change in the underlying asset. Delta values range between 0 and 1 for call options (0 to -1 for put options). A delta of 0.5 means that for every $1 increase in the underlying asset’s price, the option price will increase by $0.50.
Gamma (Γ): Gamma measures the rate of change of delta. It represents how much the delta of an option will change in response to a $1 change in the underlying asset’s price. Gamma is highest for at-the-money options and decreases as options move further in or out of the money.
Theta (Θ): Theta represents the time decay of an option. It measures how much the option’s price will decrease over time, all else being equal. Theta is typically expressed as a negative value since options lose value as they approach their expiration date. For example, a theta of -0.05 means the option’s value will decrease by $0.05 per day.
Vega (ν): Vega measures an option’s sensitivity to changes in implied volatility. Implied volatility reflects the market’s expectation of future volatility. Vega indicates how much an option’s price will change for a 1% change in implied volatility. A vega of 0.10 means that if implied volatility increases by 1%, the option’s price will increase by $0.10.
Rho (ρ): Rho measures the sensitivity of an option’s price to changes in interest rates. It represents the change in the option’s price for a 1% change in the risk-free interest rate. Rho is more relevant for longer-term options or options with significant time to expiration.
Lambda (λ): Lambda is not as widely used as the other Greeks but represents the percentage change in an option’s price for a 1% change in the price of the underlying asset. It provides a measure of leverage.
These Greek symbols help traders assess the risks and potential returns associated with options positions and develop strategies to manage their portfolios effectively. It’s important to note that these measures are estimates and rely on various assumptions, and real-world market behavior may deviate from these predictions.”
Sourced from Chat GPT. Assessed by Sean Lee