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Knowing the Greeks in Options Trading
If you trade options but do not know what the “Greeks” are, you are playing a game without knowing the complete rules.
And if you trade warrants listed on SGX but do not know that they are a form of options, then it is far worse. You do not even know what game you are playing.
In options trading, there are four greek terms that you need to understand:
- Delta – Tells you how much a change in the underlying will affect the price of the option
- Gamma – The rate of change of delta
- Theta – Measures the amount of money that the option will lose with each passing day
- Vega – Measures the sensitivity of the price of the option to changes in volatility
The terms confused me initially too, and it took me some time of researching before I could find a good explanation for them.
Be warned – they are pretty heavy stuff and it will probably take you some time before you can reach a stage of unconcious competence with regards to understanding and using the greek terms.
Rather than reinventing the wheel and trying to explain them here, I’ll direct you to a couple of good articles on this topic.
This first article helps you to understand the meaning of the greek terms:
This second article helps you to understand the relationship between them. The table in the article paints a very good picture:
Using the Greeks to Understand Options
If you go through the exercise of understanding the greeks, you will realise how important these terms can affect your options trading strategy.
On most advanced platforms, you can actually have access to these values when you are trading options.
Unfortunately, for warrants listed on SGX, you do not really know what they are. This is a severe handicap but if you can at least understand how they work, it will give you a slight edge over the rest of the playing field.