Option Greeks
Option Greeks are a set of risk measures that show how an option's price is expected to change when one input moves. Delta measures sensitivity to the underlying's price, gamma the rate of change of delta, theta the loss of value as time passes, vega the sensitivity to volatility, and rho the sensitivity to interest rates. Traders use them to understand and hedge an option position's risks.
Worked example
An investor holds a call option priced at $5 with a delta of 0.60 and a theta of −0.04. If the underlying stock rises by $2, the option's price rises by approximately delta × move = 0.60 × $2 = $1.20, to about $6.20. If instead one day passes with the stock unchanged, theta erodes 0.04 × 1 = $0.04, leaving the option near $4.96.
Why it matters
The Greeks matter because they let a trader quantify exactly which risks an option carries and how large each one is, making it possible to hedge a portfolio rather than just guess. The common pitfall is treating them as fixed: the Greeks themselves change as the stock price, volatility and time move, so a delta-neutral position can drift out of balance within hours.
Frequently asked questions
Which Greek is most important for option traders?
Delta is usually the starting point because it shows directional exposure to the underlying. Active traders also watch theta for time decay and vega for volatility risk; the right priority depends on the strategy and how long the position is held.
Are there second-order Greeks?
Yes. Gamma is the rate of change of delta, and there are further measures such as vanna and vomma that describe how the first-order Greeks themselves change. Most retail traders focus on the five primary Greeks: delta, gamma, theta, vega and rho.
Related terms: Black-Scholes Model, Implied Volatility