Options Greeks are symbols that help describe changes in price, volatility, time-decay, and more for options traders.
It’s important to remember that the Greeks are helpful tools but are not fixed metrics like a stock’s P/E ratio is. This means that these are not definite values; instead, they are useful gauges to help predict what could happen to the price or volatility of the contract.
At the end of the day, an option contract and the underlying share’s price is the most crucial factor to whether it will expire in the money, at the money, or out of the money.
We can use Greeks like Delta to help measure how much the price of an option contract will change depending on a change in the underlying share price.
Time-decay is the rate at which an option loses its value as the contract nears expiration.
It’s often said that time-decay is an option seller’s best friend and an option buyer’s worst enemy because the closer an option gets to expiration, the faster the time-decay accelerates.
Theta is one of the Greeks that helps calculate the potential impact of time decay.
Implied volatility is one of the most critical measures for planning long-term option trading strategies.
Implied volatility helps gauge future interest in an options contract and how much the market thinks or expects a contract to behave.
As a rule of thumb, implied volatility increases when there is bearish market sentiment and decreases when the market is bearish.
Now that we have had a thorough review of how the Greeks work let’s dive into the minor greeks and how you can optimize your trades with them.
Interest rates are crucial variables to investors for a multitude of reasons because they dictate how much debt will cost to a borrower or how much income will be generated from a loan.
Options are sensitive to the interest rate because they are leveraged instruments. Rho is the Greek variable that measures an option’s sensitivity to changes in the interest rate.
Rho is relatively straightforward to read because a Rho rate of 1.0 means that every 1% increase in the interest rate results in a 1% increase in the option’s value.
Rho is measured differently for call and put options because it has a positive correlation to call options and an inverse correlation to put options.
Options are considered leveraged derivatives, which means they trade at a multiple relative to the share price.
Lambda helps traders see the amount the option’s leverage changes as the price of the contract increases or decreases.
While higher-order Greeks are usually sufficient for providing necessary pricing data, Lambda is very useful for helping traders identify how much leverage they are employing in a given trade.
This information can be critical when leverage is a crucial factor in a trading strategy.
Some traders think Lambda is analogous to Vega because they are both sensitive to volatility;
however, this is not true, although they can provide similar data.
Second-order Greeks help investors understand changes and sensitivities in first-order Greeks.
Vomma is a volatility Greek that describes how an option’s Vega will react to a change in volatility.
Positive Vomma values indicate that an increase in volatility will lead to an increase in the value of the option.
Trader’s typically pair vomma and Vega to identify potentially profitable options trades depending on how volatile the market is.
Zomma is one of the most abstract Greeks because it is a third-order variable, meaning it is tertiary to both Gamma and Delta.
Since it influences Gamma and Delta, we know that that it will inform us of sensitivities to the option’s price regarding implied volatility.
Let’s break this into three pieces because third-order Greeks have a compound effect on their second and first-order counterparts:
Whether you are employing a Gamma or Delta hedging strategy, or you want to learn more about the impact of IV on your portfolio, Zomma can provide insightful data and actionable analysis.
Although Greeks can be confusing at first, outlining what variables are affected by volatility, time-decay, etc., will make the jargon more digestible and ultimately a valuable tool for developing profitable trades.
At Lantern, we seek to demystify options trading and open opportunities for all types of traders.
One of the ways we empower our members is by providing cutting edge data on various option contracts, including the Greeks.
Let us know how you use the greeks, and we hope this article serves as a valuable resource on your trading journey!