by: amaramar
Total views: 2
Word Count: 565

The Greeks have long been extolled for their extensive contributions to establishing elementary mathematics. It was the modern Greeks, however, who created the tools that aid options traders to quantify risk and calculate prices. Among these tools, one that rises above the others are the quantities known as "The Greeks." They are delta, theta, gamma and vega. The underlying mathematics regarding this tool is quite complex, but the basic concepts are simple. They can be used by any trader as a method of measuring risk and maximizing profits. The Greeks are founded on the basis of particular variables that affect the price of an option. Much of this is common sense. For example, the determinants are the underlying asset's market price, the option strike price, the time left to expiration, volatility and short term interest rates. This data is easy to acquire so it is a logical assumption that it plays a part in an option's value. The strike price is a prime example. The strike price is the contractually specified price at which the asset would have to be bought or sold if the option were exercised. If MSFT (Microsoft) was selling at $28 per share and the option considered was a June 31 call (the 31 meaning strike price, not the expiration date), the option would be out of the money because the strike price is higher than the current market price. The premium, the actual price of the option, is affected by the depth of the range of out of the money the option is. The first Greek, delta, is a way of measuring this difference. While the difference is not simple, the delta somewhat simplifies it by creating a ratio that compares the asset price change to the option price change. For instance, is the delta in the previous example was 0.7, for every rise of $1 in MSFT then the call option can be anticipated to increase by 70 cents. It is not necessary for the trader to know how to calculate the delta; they only need to know how to use it. Most reputable trading software shows all four Greeks as well as the price, expiration and other details. Delta has a tendency to increase and the option nears expiration for those who are close to in the money. Implied volatility also affects Delta. This is often included in trading software as well. Theta provides a measure of that is referred to as the "time of decay" of an option. All options have an expiration date and the closer it is the expiration date, the less likely it is that the market price will move in the desired direction. Therefore, theta measures risk and value. To further the example, if the MSFT June 31 call was priced at $3 and the theta was 0.5, then, in theory, the value of that option would drop by 50 cents per day. As the expiration of an option nears, the price for a premium typically drops at a faster rate. For example, an option that has two days before expiration, it is losing its value faster than an option that has three months till expiration. That change is what the value of theta reflects.

About the Author

Visit http://www.123onlinetrading.com to find more great information about options trading. Besides a large selection of free educational articles you can also find powerful books about online trading in general.

---

View PDF | Print View

---

Rating: Not yet rated

--Choose-- 0 1 2 3 4 5

Comments

No comments posted.

Add Comment

You do not have permission to comment. If you log in, you may be able to comment.
Next Article - Stock Market Rallies - Press Depressed!
Previous Article - Options Trading - Calls and Puts

More Related Articles In This Category

1: What are Bull Markets and Bear Markets?
2: What Causes Stock Prices To Go Up And Down?
3: Option Trading - As Risky As The Reputation?...
4: Online Trading; Why I Hate Economists!
5: Online Stock Trading - Is It Right For You?...
6: Is a Financial Market Last Straw Event on the Way?
7: Who Sets a Stock's Price?
8: Compound Stock Earnings Programs - Caveat Investor
9: Stock Exchanges - An Introduction
10: Day Trading The Extreme Sport Of Investing
11: The Fall of the Bond Markets
12: For Stock, Futures and Forex Traders The Biggest Battle To Succeed Is Within, But Why?
13: Do You Run With the Stock Market Herd?
14: Ethanol Producing Companies as Stock Investments
15: Stock Trading Made Too Easy
16: New Bull Market Surge Underway?
17: Tips For Stock Market Trading- Beginners' Guide
18: What's The Difference Between Technical and Fundamental Investing?
19: What is Short Selling and How to Benefit From It?
20: Setting Specific Investing Goals
21: There Is No Place For Emotions In The Stock Market
22: You Will Never Make Money Trading Stocks, Futures Or Forex Part 4
23: Is Insider Trading Illegal?
24: Painful First Quarter for World Financial Markets
25: You Can Be A Stock Market Investor

---

For WebMasters

Link This Article - HTML Code -

<a href="http://americanahost.com/articles/finance/stock-market-investing/options-trading-blessed-are-the-greeks-part-i.html" target=_blank>Options Trading - Blessed Are the Greeks - Part I</a>

Link This Article - BBcode -

[url=http://americanahost.com/articles/finance/stock-market-investing/options-trading-blessed-are-the-greeks-part-i.html]Options Trading - Blessed Are the Greeks - Part I[/url]

Copy This HTML Code To Put This Article In Your Web Site.

<h1>Options Trading - Blessed Are the Greeks - Part I</h1><br><br> <br><br> The Greeks have long been extolled for their extensive contributions to establishing elementary mathematics. It was the modern Greeks, however, who created the tools that aid options traders to quantify risk and calculate prices. Among these tools, one that rises above the others are the quantities known as "The Greeks." They are delta, theta, gamma and vega. The underlying mathematics regarding this tool is quite complex, but the basic concepts are simple. They can be used by any trader as a method of measuring risk and maximizing profits. The Greeks are founded on the basis of particular variables that affect the price of an option. Much of this is common sense. For example, the determinants are the underlying asset's market price, the option strike price, the time left to expiration, volatility and short term interest rates. This data is easy to acquire so it is a logical assumption that it plays a part in an option's value. The strike price is a prime example. The strike price is the contractually specified price at which the asset would have to be bought or sold if the option were exercised. If MSFT (Microsoft) was selling at $28 per share and the option considered was a June 31 call (the 31 meaning strike price, not the expiration date), the option would be out of the money because the strike price is higher than the current market price. The premium, the actual price of the option, is affected by the depth of the range of out of the money the option is. The first Greek, delta, is a way of measuring this difference. While the difference is not simple, the delta somewhat simplifies it by creating a ratio that compares the asset price change to the option price change. For instance, is the delta in the previous example was 0.7, for every rise of $1 in MSFT then the call option can be anticipated to increase by 70 cents. It is not necessary for the trader to know how to calculate the delta; they only need to know how to use it. Most reputable trading software shows all four Greeks as well as the price, expiration and other details. Delta has a tendency to increase and the option nears expiration for those who are close to in the money. Implied volatility also affects Delta. This is often included in trading software as well. Theta provides a measure of that is referred to as the "time of decay" of an option. All options have an expiration date and the closer it is the expiration date, the less likely it is that the market price will move in the desired direction. Therefore, theta measures risk and value. To further the example, if the MSFT June 31 call was priced at $3 and the theta was 0.5, then, in theory, the value of that option would drop by 50 cents per day. As the expiration of an option nears, the price for a premium typically drops at a faster rate. For example, an option that has two days before expiration, it is losing its value faster than an option that has three months till expiration. That change is what the value of theta reflects.<br><br> <h3>About The Author</h3> Visit http://www.123onlinetrading.com to find more great information about options trading. Besides a large selection of free educational articles you can also find powerful books about online trading in general.<br><br> Keywords: <b>options trading, trading options, options, online options trading, online trading</b> <br><br>Article Source : <a href="http://americanahost.com/articles"><b>Articles Directory</b></a></br> Article URL : <a href="http://americanahost.com/articles/finance/stock-market-investing/options-trading-blessed-are-the-greeks-part-i.html" target=_blank>Options Trading - Blessed Are the Greeks - Part I</a></br> Article Category : <a href="http://americanahost.com/articles/finance/stock-market-investing/">Stock Market Investing</a></br> Article Author : <a href="http://americanahost.com/articles/profile/amaramar-378.html">amaramar</a>

---

Article URL : Options Trading - Blessed Are the Greeks - Part I
Article Category : Stock Market Investing
Article Author : amaramar