If you want to use ‘the Greeks’ to understand the movement of options, you will need to understand only 4 words: Delta, Gamma, Vega & Theta. These 4 Greeks, which are pretty useful in the measurement of risks in an Option, actually shed light on a number of variables that may have an impact on the prices of Options. These variables could be:
# Market Volatility: If the volatility is higher, it usually augurs well for going with Put and Call options, if you have been holding an Option for a long duration of time. However if you happen to be the writer of an Option, volatility could mean a downslide.
# Expiration time: The closer you will get to the expiry of an Option, the lesser and lesser will be your chances of profit. So if you have been holding an Option for long, you will need to consider this aspect as well to minimize your losses and maximize your gains.
# Price variation in underlying asset: A spike in the price of the underlying asset generally has a favorable influence on the price of a Call option. A reduction however in underlying asset’s price would be more suited for Put Options and vice versa.
# Rate of Interest: Interest rates have a lesser significance on the prices of the Options compared to other factors in most instances. But higher interest rates do make call options more dearer and put options less expensive to afford in general.
Delta’s impact on Options Trading: Delta helps in assessing the impact of variations in underlying asset’s price on the premium of an Option. Delta can be better comprehended as the change in the value of an option for every 1 point fluctuation in the underlying asset, which is replicated in the price of an Option. So Delta acts positively for Calls and negatively for Puts.
Gamma’s impact on Options Trading: Gamma on the other hand measures the rate of change of Delta in context to variations in the price of the underlying asset, and it allows you to assess how much you are potentially going to make or lose based on the variations in the underlying position.
Theta’s impact on Options Trading: Theta measures the impact on the price of an Option based on the time left before its expiry. It helps in comprehending the erosion of premium on an Option. Understanding Theta helps you in comprehending its effects on Delta, so that you can better wrap your head around the dynamics of Options Greeks.
Vega’s impact on Options trading: Vega helps in measuring exposure to risk in the wake of changes in implied volatility and helps in assessing an option’s price and how it will go as the volatility of the option varies.