The Greeks of Option Price Changes

Option Prices

Tonight I want to do something a little different.  I would like to talk about a seminar I attended a few months ago hosted by the Options Industry Council.  They hold educational seminars for free all across the country throughout the year.  So in a sense, this article is like free advertising for them.

The Options Industry Council

Investor’s Business Daily is also involved.  They have good material that is worth reading before deciding to invest some of your money in options or the stock market.

The marketing pitch is over — let’s talk Greek.  The following six variables are what influence option price behaviour.  Next to them are the corresponding articles that describe each variable.

Most important conclusion for each variable:

Δ “Option prices do not change dollar-for-dollar with changes in stock price. Option prices change by the delta.”

Γ “The delta [Δ] of an option tells you your share-equivalent market exposure right now, and gamma [Γ] tells you how quickly that exposure will change.”

\nu “Volatility tends to rise and fall in consistent ranges” and is one of the most important variables commonly overlooked.

Θ “Time decay is measured in units of time, and theta is the estimated change in option price for a one unit change in time to expiration, assuming other factors remain constant.”

Ρ “Is Rho Useful?”

Given that a “large” change in the short-term interest rate — greater than one full percentage point — is unlikely to occur in a short period of time — less than one month — it seems clear that rho should not be a big concern to option traders.

“But wait a minute!” some traders protest. “When Bernanke hinted that interest rates would rise, the market dropped dramatically; and that drop caused option prices to change dramatically as well!”

Yes, fear of rising rates caused the market to drop, but it was the drop in the market that caused option prices to change. It was not the rise in the interest rate with other factors unchanged. It was the delta that caused the change in option prices, not the rho.”

An article for my future reference:

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