Jun 04

Option Greeks – 7 min screencast

by David Harper, CFA, FRM, CIPM

Atlas-[Converted]

This is a brief review of the option Greeks. They are sensitivities: what is the change in option price with respect to [stock price | volatility | rate | term]. Specifically:

  • Delta: change in option price with respect to stock price; if stock price changes by a small amount (i.e., it's a linear approximation, so it must be a small amount), how much does option price change?"
  • Gamma: change in delta with respect to stock price; i.e., how much is delta changing.
  • Vega: with respect to volatility
  • Rho: with respect to rate
  • Theta: with respect to term

Why do we care in risk? Because these are not just option value inputs, they are risk factors underlying a portfolio of options. We care about the change in portfolio value. How do we asses that? Not so much directly as via sensitivities to the inputs (the risk factors). For example, if rates change, how sensitive (rho) is the portfolio to such a rate change?

Screencast:

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