# 3.4 Introducing The Greeks

##### ðŸ’¡ In this article, you will learn about:

- What "The Greeks" are
- Delta, Gamma, Theta, Vega, and Rho
- How Options Greeks are used

### What Are "The Greeks"?

**The Greeks** provide traders with valuable insights into the behavior and risk of options contracts.

They are a set of parameters that help quantify the sensitivity of an option's price to various factors such as changes in the underlying asset price, time decay, implied volatility, and interest rates.

There are five main options Greeks that traders commonly refer to: **Delta**, **Gamma**, **Theta**, **Vega**, and **Rho**. Each Greek represents a different aspect of an option's nature and plays a crucial role in understanding how options behave.

Let's begin with the most important and basic of the squadron: **Delta**.

### Delta

**Delta **measures the rate of change in the option price relative to changes in the underlying asset price.

Simply put, Delta tells us how much the option's value will change for a $1 move in the underlying asset price.

If a call option has a Delta of 0.6, it means that for every $1 movement in the underlying asset price, the option's price will move by approximately $0.60.

### Gamma

**Gamma **measures the rate of change in an option's Delta relative to changes in the underlying asset price.

In essence, Gamma indicates how much Delta itself will change for a $1 increase in the underlying asset price. So, Delta gauges the sensitivity of an option's price, while Gamma gauges the sensitivity of Delta.

A higher Gamma means that the option's price becomes more sensitive to changes in the underlying asset price. If an option has a gamma of 0.08, it means that for every $1 increase in the underlying asset price, the option's delta will increase by 0.08.

### Theta

**Theta **measures the rate of time decay in an option's value.

Along with Theta and the other Greeks, the concept of time decay will be covered more in-depth in Options Course 4: The Greeks. For now, all you need to know is that Theta gauges how much the price of an option will decrease as it moves closer to expiry.

This is because as time passes and an OTM option moves closer to it's expiration, the chances of the option expiring ITM become lower. The option becomes less valuable with time, assuming everything else stays equal.

If a call option has a Theta of -0.05, it means that the option's value will decrease by $0.05 per day due to time decay.

### Vega

**Vega **measures the sensitivity of an option's price relative to changes in implied volatility.

Simply enough, Vega tells us how much the option's price will change for a 1% increase in implied volatility.

If an option has a Vega of 0.10, it means that the option's price will increase by $0.10 for every 1% increase in implied volatility.

### Rho

**Rho **measures the sensitivity of an option's price to changes in interest rates. It indicates how much the option's price will change for a 1% change in interest rates.

If a call option has a Rho of 0.04, it means that the option's price will increase by $0.04 for every 1% increase in interest rates.

### In Summary

Options Greeks provide valuable insights into the behavior of options, and understanding them thoroughly is *crucial *to trading options successfully. Analyzing the interplay between Greeks can also prove to be highly beneficial, not to mention applying the lessons learned to understanding the overall markets. So, let's recap:

**Delta **measures the rate of change in the option price relative to changes in the underlying asset price.

**Gamma **measures the rate of change in an option's delta relative to changes in the underlying asset price.

**Theta **measures the rate of time decay in an option's value.

**Vega **measures the sensitivity of an option's price to changes in implied volatility.

**Rho **measures the sensitivity of an option's price to changes in interest rates.

###### Test Yourself!

What does Theta measure?

Theta measures how much an option's price will change according to a $1 change in the underlying asset price.

Theta represents the sensitivity of Delta relative to the underlying asset price.

Theta, also known as time decay, measures how much an option's price will decrease with the passage of time.