Archive for the ‘greeks’ Category
The Greeks: Delta
Options are complex! Their value being determined by a long mathematical equation, with many sub-equations and variables. I can’t write the formulas out for you. Not because they’re secret, but because my keypad doesn’t contain the crazy looking symbols used in the formulas.
Each aspect of option pricing is a separate component of the formula. To remove confusion, each component has a Greek title; Delta, Gamma, Theta, Vega, and Rho. Do you wonder? Should that last sentence read, “To ADD confusion?” Everyone knows Vega is not Greek. It’s a Chevrolet.
The first and most important of the “Greeks” is Delta. It is probably one of the most common known of the “Greeks,” but it can be looked at three ways. Two of which are widely accepted. The third is far less important and really only theoretical. Most quasi-knowledgeable traders only know one or two. We’ll discuss only one this week.
The first and most important way to look at Delta: Delta measures the rate of change in an option’s price compared to a one point ($1) movement in the underlying security.
Since the rate of change in the price of a stock is measured dollar for dollar, their movement is 100%. Stocks have a Delta of 1.00. Don’t worry; stock prices do not have any other “Greeks,” only Delta.
