### Memorizing the Greeks

Every experienced option trader should know how to use the option greeks to evaluate their current positions as well as being able to do a “what-if?” analysis to determine what might happen to their positions given changes in price, time, or volatility. In my experience, most newer traders (and some not-so-new ones) have not taken the time to really understand and memorize the basic, practical rules that affect their ability to analyze their trades. Not only that, I’ve never seen a concise list of the characteristics I’ve found to be most important.

To that end, I’ve developed a list of what I consider to be the most essential rules and characteristics to remember about the greeks. Nothing esoteric here, just practical information.

Within each category (greek) I’ve also listed the characteristics from most to least important, and sub-characteristics under each major characteristic as a sub-bullet. (Tip: if you have trouble remembering the sub-bullets, just memorize the numbered items, since the sub-bullets follow intuitively from concept in the numbered items anyway.)

#### Delta

- For each one point increase in the underlying price, the value of the
*delta*is added to the value of the option.- Conversely, for each one point decrease in the price of the underlying, the value of
*delta*is subtracted from the value of the option.

- Conversely, for each one point decrease in the price of the underlying, the value of
- The
*delta*of call options is always positive (0 to 100) and the*delta*of put options is always negative (0 to -100). - The
*delta*of an at-the-money option is approximately .50 (calls) or -.50 (puts). - The
*delta*of an option at expiration is either 0 or 100 (-100 for puts).

#### Gamma

- For each one point increase in the underlying price,
*gamma*is added to*delta.*- Conversely, for each one point decrease in the price of the underlying, the value of
*gamma*is subtracted from*delta*.

- Conversely, for each one point decrease in the price of the underlying, the value of
- For all positive
*theta*positions,*gamma*is always negative.- Conversely, for all negative
*theta*positions,*gamma*is always positive.

- Conversely, for all negative
- For out-of-the-money positions such as condors,
*gamma*is generally small compared to*delta*and inconsequential, whereas*gamma*is generally larger and has bigger associated risk for at-the-money positions such as calendars.

#### Theta

- For each day that passes, the value of
*theta*is added to the value of the option. - Long option positions are
*theta*negative (lose time value each day), while short option positions are*theta*positive (gain time value each day). - For longer term options,
*theta*decay is slower, conversely shorter term options have faster*theta*decay.

#### Vega

- For every 1% volatility increase in the underlying asset, the value of
*vega*is added to the value of the option.- Conversely, for every 1% volatility decrease, the value of
*vega*is subtracted from the value of the option.

- Conversely, for every 1% volatility decrease, the value of
- The impact of volatility changes is greater for at-the-money options than it is for in- or out-of-the-money options.
- The impact of volatility changes is greater for longer term options and less for shorter term options.
- Changes in
*vega*can have more impact (i.e. you should worry about it more) for multi-month spreads (calendars, diagonals) than for single-month spreads (verticals, condors).

#### Rho

- For every 1% increase in interest rates, the value of an option increases percentage-wise by the value of
*rho*.- For example, if the
*rho*of an option is 2.5, and interest rates increase by 1% ,then the value of the option increases by 2.5%.

- For example, if the
- For two reasons, you can usually ignore
*rho*for most practical purposes. First, interest rates don’t change that often, and second, for short term options,*rho*is small and doesn’t have much effect. *Rho*is more important for long term options such as LEAPs.

Profitable Trading!

**Jay Bailey**

Sheridan Options Mentor

{ 6 comments… read them below or add one }

I have a trick to remember the importance of delta and gamma, but using a car analogy. Delta is the current speed of the car, and gamma is the acceleration. My delta is now at 30, for example, so I know the risk of my position *right now*, but what happens if there is a move in the market? I may be happy with the risk at 30, but if the gamma is very high, that means that a small movement in the underlying could have explosive results on my risk. Suddenly it goes from 30 to 45, for example.

So, think of delta as current risk (the speed) and gamma as projected risk with a move in the market (acceleration). With market movement, is there just a tap on the accelerator, or is it “pedal to the metal”.

Interesting, I`ll quote it on my site later.

Robor

Hi Robor,

What’s your site url?

hello,

thanks for the great quality of your blog, each time i come here, i’m amazed.

black hattitude.

Some call gamma the delta of the delta.

Gamma is the acceleration of price changes…2nd derivative or the slope of the delta chart. Since delta is the slope of the price chart, that’s an easy way to remember it. Thanks Patricia!