If you are into stock trading, you must have come across the concept of Options Greeks at some time. These Greeks represent a method of assessing the performance of a specific underlying asset. They help determine how the stock is placed at present, and how its value will be affected in the near future. Doing this reduces the risk related to stock trading by a significant margin. You can precisely predict the future of your investment and whether making one would be beneficial for you or not.
- Options Greeks are always helpful; however, you must also know when you need to use a specific Greek to get a desired outcome. There are 4 of them in general, each of which control the different aspects of an underlying asset.
- Delta determines the hedge ratio of the stock. This means it is used to gauge the likelihood that the option you are working on with expire in the money after a given time.
- Gamma is used to assess the rate of change of Delta. It estimates how the value of Delta is affected with the change in the price of the available stock
- Theta is used for evaluating the effect of time decay on the stock. You can precisely calculate how much the value of an option will be lost with every passing day as the expiry date of the stock approaches.
- Vega is the measurement of stock’s sensitivity to volatility. It can help you assess the sensitivity of an option in regards to the large variations in the cost of the underlying stock.
There is also a fifth Options Greeks that usually doesn’t affect the performance of the underlying stock. However, very rarely, it is used to track the sensitivity of the stock value to the change in the interest rates. Options contracts can be drawn based on the performance of these 5 parameters. Using them effectively and when they are needed can help ensure that there is minimal risk of incurring a loss while trading in underlying stocks.
You must also remember that these are just theoretical parameters, and despite their accuracy and effectiveness these do not directly impact the performance of a stock. They merely evaluate the performance better than any other method, which is why they are the best option you can opt for to evaluate the risk before making an investment.