Understanding Option Greeks
When determining how options may react to a given change in some of the variable pricing inputs, investors turn to the Greeks for guidance. The most commonly used Greeks are Delta, Gamma, Theta, Vega, and Rho. Greeks are not a guarantee of exact option premium changes, but rather a theoretical guidepost that gives investors an estimate of an option’s value when the underlying moves, interest rates or dividends change, time changes, or implied volatility changes. Most pricing models use the following inputs to determine theoretical values and the corresponding Greeks:
- Stock price
- Strike price
- Time to expiration
- Implied volatility
- Interest rate
- Anticipated ordinary dividends
Some of these variables, like implied volatility and stock price, change constantly during market hours while strike price, interest rate and dividend assumptions may not change at all for the life of the contract. If you know all of these inputs, you can use the OIC Calculators to theoretically price an option. If you don't know the implied volatility, our calculators can help with that too if you know the option’s premium. This is in essence what sophisticated trading systems do, but they will generate theoretical values for all options on a certain product at the same time. As the input criteria changes and time passes, the output from the pricing models will adjust too.
Using OIC's pricing calculators, let’s take a look at the different Greeks and how they may affect each other. You can find Greeks by entering a symbol and looking at the OIC’s delayed Detailed Options Chains.