4 Most Important Stock Option Greeks | Options Trading Concepts

Between Delta, Gamma, Theta & Vega, one option greek rises to the top in terms of importance. @doughTraderMike gives you his opinion on why he thinks Delta is the most important of the four!

New to options trading? Mike breaks down trading strategies and concepts in a visual way for beginner to intermediate investors.

Click the link below to learn more:
http://ow.ly/Y0zXE

Follow:
@doughTraderMike

Use the hashtag #whiteboard to discover more options trading concepts!

======== tastytrade.com ========

Hosted by Tom Sosnoff and Tony Battista, tastytrade is a real financial network with 8 hours of live programming five days a week during market hours. From pop culture to advanced investment strategies, tastytrade has a broad spectrum of content for viewers of all kinds! Tune in and learn how to trade options successfully and make the most of your investments! Watch tastytrade LIVE daily Monday-Friday 7am-3:30pmCT: http://ow.ly/EbzUU

Subscribe to our YouTube channel: https://www.youtube.com/user/tastytrade1?sub_confirmation=1

Follow tastytrade:
Twitter: https://twitter.com/tastytrade
Facebook: https://www.facebook.com/tastytrade
LinkedIn: http://www.linkedin.com/company/tastytrade
Instagram: http://instagram.com/tastytrade
Pinterest: http://www.pinterest.com/tastytrade/

---

Closed Caption:

hey everyone welcome back thanks so much
for tuning in my name is mike and today
we're going to host a battle of the
Greeks so we're going to cover the most
memorable reeks and the Greeks that we
actually talked about and think about
every single day 3 look at Delta Gamma
theta and Vega we're going to think
about what the implications of these
Greeks are but really we're going to
boil down to what Greek matters the most
and i actually took a poll of the
research team we all have the same idea
but I'm not going to tell you what it is
just yet so but before we get into it
let's go on to the next slide we'll talk
about these for Greeks and really the
main thing that we're looking at in
terms of looking at the Greeks and
understanding what we're trying to
understand with our portfolio and also
on a trade basis so for each of these
Greeks I can basically boil down each of
them just to one word so we're looking
at delta we're really looking at
direction there's a lot of other things
that Delta can be used for but mainly
we're looking at directionality so we're
seeing if I'm bullish on a trade if I'm
bearish on a trade or if my whole
portfolio is skewed to the downside are
skewed to the upside that's going to be
Delta we're gonna be able to see where r
directionality is and basically where
our assumption lies by looking at delta
we're looking at gamma we're going to be
thinking about acceleration so we're
talking about Gamma we're going to
really focus on the acceleration of
something else we're going to dive into
that and we'll explain it with an
example and with theta the very the one
word we need to know is time data is the
rate of decay of an options price so
basically we're thinking about time and
how time value is either beneficial for
us or if it's going against us depending
on whether we're short options are long
options but will dig into that as well
and lastly Vega so with Vega we're
really just focused on our volatility
exposure and what that means from buyer
side in a cellar side so let's walk
through delta really quickly on the next
side and we'll talk about what we're
looking for and what it really means and
some other uses other than that
direction
reality so when we're looking at delta
the basic definition is it's a rate of
change of an options price given a one
dollar increase in the underlying price
so if I've got a call that's trading for
a dollar fifty and I have a point five
Delta if there's a one dollar increase
in the underlying price then I should
see that call value increased to two
dollars so you can see that my call went
from a dollar fifty to two dollars with
a one dollar increase in the underlying
price so that is where i get that 50
delta value so basically with a
one-point increase in the underlying my
option increased fifty cents which is
pretty good so where we know that when
we're looking at this sort of option
which I want you to realize with delta
is that Delta has it usually at the
money value of around 50 so i would know
right away if I'm looking at a 50 Delta
option i'm looking at an option that's
pretty close to being at the money the
more we move in the money or below the
stock price with calls the Delta is
going to get deeper and deeper and
basically higher and higher closer to
that 100 delta value and as we move
further out of the money or above the
stock price with calls are adults is
going to decrease below 50 and
eventually we'll have a delta of 0 if
you get really far out of the money and
it's not being traded at all but there
are some other things that we use Delta
Force oh no one thing that we can use it
for is our probability of in the money
percentage so instead of looking at
probability of being in the money we can
actually also look at delta and we'll
get a pretty rough estimate of the same
value so if I've got a delta of 50 i
know we're at the money so I'm going to
probably have a probability of being in
the money of fifty percent because I'm
really right at the money so I've got a
50-50 shot on either side but if i'm
looking more deeper in the money so if i
have a higher probability of being in
the money which would definitely be true
for in the money options i'm going to
have a higher Delta and not conversely
if I'm looking out of the money i'm
going to have a lower probability of
being in the money so if I've got like a
20 Delta option i'm definitely looking
out of the money and my probability of
that option expiring in the money would
probably be around 20 as well so usually
we can use Delta energy
angely when we're looking at the option
and looking at delta value and comparing
it to the probability of being in the
money we can also use it as a hedging
tool so if we consider and realized that
options are the theoretical equivalent
of 100 shares of stock if I actually own
100 shares of stock and that would give
me 100 Delta because every share of
stock it gives me 1 Delta then if I've
got 100 long shares and i'm looking to
hedge those long Delta's from those 100
long shares what i could do is create a
covered call so that's basically what a
covered call does is it gives us the
ability to hedge our long exposure by
selling a call against at so if i sold a
30 Delta call since i'm selling a call
it's going to give me a negative Delta
so I instantly hedge my 100 Delta's down
to a 70 Delta because if I have long 100
deltas and I sell 30 Delta's against it
that did that Nets me out to 70 so we
can use it as a hedging tool but all in
all were really looking at the
directionality for Delta so with Bulls
if I have a positive Delta that would
indicate that i'm bullish on the
underlying or bullish on the market and
if i have a negative Delta that would
indicate that I'm bearish on the market
or that I'm a bear when it comes to
where I want the market to go so
positive Delta I want the market to go
up or underlying to go up negative Delta
I want the underlying or market to go
down so let's move on to the next week
which will be gamma so gamma is the rate
of change of Delta given a one-dollar
move in the underlying price so let's
say that these calls i'm showing you the
delta value here so if I've got a call
and it has a delta value of 65 which
means it's definitely in the money
because that delta value is higher than
50 and I have a point 05 gamma if the
underlying price moves up one dollar and
now my Delta is 70 that's where i'm
getting that gamma from so basically the
change of Delta is what gamma is so what
there's a few things that we need to
know
well number one is that usually when
we're looking at gamma it's going to
accelerate that Delta so when we're
looking at how r delta changes now if we
look at our Delta of 65
with a one dollar increase i should
theoretically make 65 cents on this call
because Delta is the rate of change of
the options price so if i have a one
dollar increase i'm going to make
theoretically 65 cents on that option
but now once that move has happened i
now have a delta of 70 because my call
would be deeper in the money it totally
makes sense if i buy a strike here and
the stock prices here when the stock
price goes up my call is now deeper in
the money so if i have a new Delta of 74
the next one . up i'm actually going to
make seventy cents as opposed to 65
cents so it accelerates our profits and
it can also accelerate our losses
depending on what side of the coin Iran
and one thing to realize is that gamma
increases at expiration so for here when
i'm looking at a gamma of about five or
. 05 it's a pretty low value but if I'm
closer to expiration where there's only
five or six days left i might see a
gamma of 15 or maybe 20 where I'm going
to see my Delta rapidly change which can
either be good or bad depending on my
situation so we're looking at gamma it's
going to be a positive thing for buyers
so if I were to buy a naked option which
isn't something we normally do here but
if i were to buy a naked option gamma
would actually be on my side because if
the underlying continually goes for me
and continually moves my strike deeper
in the money i'm going to make more and
more value for every extra dollar that
the option goes in the money or every
extra dollar that the underlying
increases and for that reason it's going
to be a bad thing for sellers which is
why we tend to roll our positions so if
i have a position that expires this week
i'll look to roll it to an expiration
cycle because the more time we have on
our side the lower the gamma is going to
be so if I'm a seller of an option
I don't want my option prices to whip
around the whole name of the game for us
is having time on our side and giving
ourselves that 45 days to expiration
window where we can slowly realize the
profits through theta so we're looking
at gamma if i were to buy naked options
or just buy a maybe a diagonal spread
something like that
going to have gamma on my side when I'm
have 1i have an option that's going to
be profitable for me when it goes deeper
and deeper in the money so that's
usually from the long side and for that
reason we're looking at $TIME sellers
it's the opposite so if i'm selling an
option gamma is going to be something
that could hurt me over time because if
my option moves in the money which is
bad for a seller the deeper it moves in
the money the more and more my losses
will accelerate so let's go on to the
next the next week which is going to be
theta and theta again is basically just
the rate of decay of an options price
with the passage of one day all else
equal so when I say all else equal i
basically mean we're freezing the option
market and stock markets or no activity
there no price movement and we're
freezing the implied volatility of that
underlying as well so if I freeze both
the both of those things and I see a
theta value if i look at the theta ever
look at the option value the very next
day it should have dropped by that theta
value so let's say I've got a call that
training for two dollars and the passage
of one day goes by and my call is now
worth a dollar ninety-five and we had
these same exact implied volatility
values and the same exact stock price
when we compared it to this value here
well if both of those things are exactly
the same then I know that my theta would
have been . 05 so i'm looking at a
five-set decrease in the option price
given the passage of one day all else
equal so really what I'm looking forward
theta is who had been who is a benefit
for when we're looking at theta from
that perspective
well the very first thing i know is that
if I'm a seller of an option i want the
option to decrease so if i'm selling an
option here i want the option to decay
with every day that passes to allow me
to buy it back at lower price for profit
so if I'm a seller theta is going to be
beneficial to me and if I'm a buyer it's
going to be the opposite because if i
bought this call I need the underlying
to move up in price because when I by a
call i want to be able to buy those
shares at a discount which is exactly
what would happen if the stock prices
continue to rise but if it doesn't rise
and nothing happens but time passes then
my option is going to be less
worth less and less over time so first
buyers theta is going to be a negative
impact on that option and one
interesting thing is that when we're
looking at theta it actually decreases
for out-of-the-money options at
expiration because out-of-the-money
options as we get closer to expiration
they become pretty much worthless so
there's not much else to decay if an
option is only worth two or three cents
and there's five days left
it can't really decay any further than
that until it hits zero but without the
money options that definitely hold their
value the longest if I've got five days
left i probably could see an option
still worth maybe 20-30 sense so it
still is going to have that theta and
it's going to accelerate because at
expiration it has to be worth zero if
it's right at the money so you're going
to see theta increase for at-the-money
options and you're going to see theta
kind of weaning off for out-of-the-money
options but let's get to our last Greek
which is Vega and really vega is just
our rate of change of an option price
given a one percent increase or move and
implied volatility so let's say I've got
that same exact call training for two
dollars and i've got a 20 Vega value if
implied volatility increases by 1% in
that underlying then I should see my
call increased by 20 cents so you can
see my call goes from two dollars to 220
which gives me that 20 Vega value and
really all we're looking here all we're
looking for here with this metric is
really just our exposure in terms of
implied volatility and one thing to note
is that it is accumulative IV exposure
so if i sell one option i'm going to
have a vague evaluation short Vega value
because when we sell options
we're going to have a negative value and
when we buy options we're going to have
a positive value so if I'm continually
selling options let's say I sell 10
different options in 10 different
underlying i'm going to have all those
options adding up to my Vega exposure so
that's why we usually tend to sell some
options here maybe do a diagonal spread
which would be a long bay exposure and
really tend to balance that out but
we're up what always boils down to is
really what Greek matters the most let's
go into the next slide and we will
reveal that for you so for us here at
tastytrade we believe that Delta is the
winter when it comes to one Greek if we
were to focus on one Greek in one week
alone we would say it's delta
reading really comes down to pnl and
Delta gives you those accurate
expectations and also Delta is by far
the most versatile Greeks as you saw we
can use it as a proxy for our
probability of being in the money we can
know how much we need to head your
position based on delta and really
looking at delta gives me an idea of
what i need to do so if I see my bait
awaited SP y delta is like you might see
in the dough platform and let's say
they're really negative i know right
away that I need to add some positive
Delta's if I want to get back into that
delta neutral zone so looking at delta
quickly can give me a good understanding
of what i need to do next so thanks so
much for tuning and hopefully you
enjoyed this segment my name is mike if
you've got any questions or feedback
should be an email here or you can
follow me at doe traitor Mike stay tuned
we get jim schulz coming up next
what up everybody i hope you liked this
video click below and watch more videos
subscribe to our channel and don't
forget to check out tastytrade . com