The Greeks Explained - How to Trade Options

Check out my entire playlist on Trading Options here:

Like, Comment, and Share my videos!

💯 LET’S CONNECT 💯

👇 👇 Watch My Other Videos Here 👇 👇
★ How to Swing Trade Stocks (THE BASICS)
★ My $25,000 Brokerage Account Challenge (2021)
★ How to Trade Options (Buying Call Options)

================

The Basics of The Greeks
Greeks encompass many variables. These include delta, theta, gamma, vega, and rho, among others. Each one of these variables/Greeks has a number associated with it, and that number tells traders something about how the option moves or the risk associated with that option. The primary Greeks (Delta, Vega, Theta, Gamma, and Rho) are calculated each as a first partial derivative of the options pricing model (for instance, the Black-Scholes model).

Delta
Delta (Δ) represents the rate of change between the option's price and a $1 change in the underlying asset's price. In other words, the price sensitivity of the option is relative to the underlying asset. Delta of a call option has a range between zero and one, while the delta of a put option has a range between zero and negative one. For example, assume an investor is long a call option with a delta of 0.50. Therefore, if the underlying stock increases by $1, the option's price would theoretically increase by 50 cents.

For options traders, delta also represents the hedge ratio for creating a delta-neutral position. For example if you purchase a standard American call option with a 0.40 delta, you will need to sell 40 shares of stock to be fully hedged. Net delta for a portfolio of options can also be used to obtain the portfolio's hedge ration.

A less common usage of an option's delta is it's current probability that it will expire in-the-money. For instance, a 0.40 delta call option today has an implied 40% probability of finishing in-the-money. (For more on the delta, see our article: Going Beyond Simple Delta: Understanding Position Delta.)

Theta
Theta (Θ) represents the rate of change between the option price and time, or time sensitivity - sometimes known as an option's time decay. Theta indicates the amount an option's price would decrease as the time to expiration decreases, all else equal. For example, assume an investor is long an option with a theta of -0.50. The option's price would decrease by 50 cents every day that passes, all else being equal.

Theta increases when options are at-the-money, and decreases when options are in- and out-of-the money. Options closer to expiration also have accelerating time decay. Long calls and long puts will usually have negative Theta; short calls and short puts will have positive Theta. By comparison, an instrument whose value is not eroded by time, such as a stock, would have zero Theta.

Gamma
Gamma (Γ) represents the rate of change between an option's delta and the underlying asset's price. This is called second-order (second-derivative) price sensitivity. Gamma indicates the amount the delta would change given a $1 move in the underlying security. For example, assume an investor is long one call option on hypothetical stock XYZ. The call option has a delta of 0.50 and a gamma of 0.10. Therefore, if stock XYZ increases or decreases by $1, the call option's delta would increase or decrease by 0.10.

Vega
Vega (v) represents the rate of change between an option's value and the underlying asset's implied volatility. This is the option's sensitivity to volatility. Vega indicates the amount an option's price changes given a 1% change in implied volatility. For example, an option with a Vega of 0.10 indicates the option's value is expected to change by 10 cents if the implied volatility changes by 1%.

================
#OptionsTrading #OptionsGreeks #TheGreeks
================

DISCLAIMER:
This video is for entertainment purposes only. I am not in any way acting as an agent or representative of the Department of Defense or United States Federal Government when presenting this information. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.

[JakeBroe]

Give this video a LIKE to support my channel! Also check out my entire playlist on Trading Options here!

[raymondsimmons]

You are so kind to explain the derivatives of options so people can be smarter options traders! A video like this is extremely helpful to viewers.

[haideriraqi]

hi Jake, you are great, English is my second language, I understand nothing when watching explanations in my native language, but you made it look very simple and easy. thanks man

[bryonmorgan]

Jake, I have been binge watching your videos. Thank you for the transparency and sincerity. I have been learning a ton!! Please keep the video coming!!!!

[Yeah_Buddy_LIGHTWEIGHT]

Jake, these videos are the best. Highly underrated! I've watched the first few videos in the options playlist and they have been so helpful. I feel infinitely more confident that, with a little practice on paper trading, I can start trading options in my actual portfolios! Thank you so much for these informative videos. They deserve far more views and engagements.

[deviambati]

Hello Jake, your explanation of Greeks is most outstanding and easy to understand. I have watched several videos on Greeks, but I am much more confident now. It will be great if you could take an example and show how the option premium changes when all values are taken into account for one or two days. Hats of to your dedication in making the learning more practical.

[edschofield]

Curiously, the least number of likes for the most valuable video!!! The world is weird. Jake you are the friggin best!

[mindaugasInvest]

Great job! Your earned yourself a new subscriber 🙂

[stevephoung]

Thanks Jake! i don't usually comment. but most of your videos are easy to understand. i have learned a lot from you. you are the only guy that i click the like button the most. Keep making great videos. 😁

[peternguyen]

Hi Jake, thanks a lot for this video. I have traded options since 2012. I only know Delta. Seriously, you should change your career to become a teacher/professor.

[solwlady]

The best explained option classes, genius. Thank you very very much

[sexyemay]

Great video. I'm just learning option trading and you are really explaining everything in easy terms for understanding. Keep up the good work, thanks for your help and God Bless you.

[abdinasirmohamud]

Thank you very much Jake, I really enjoyed it and learned a lot from your videos, you’re amazing

[peleliuvet]

Delta, Vega and Theta. My new 3 best friends. Old video, but timeless info!

[michaelmack]

By far the best and most easily understood video about the Greeks. Especially Theta. I like having maximum control of my contracts so when I buy I prefer buying LEAPS and selling very short term such as weekly calls .I think in your prior videos you like an expiration date about 35 days out. Why wouldn't you prefer a much shorter expiration date such as 7-14 days to get the higher premium decay?

[deadleague]

Very helpful video for me. Thanks Jake.

[edschofield]

The dividend does play a part in the pricing of options in a big way around the dividend date.

[mysorep]

great video, professor.do you have a video or can you make one of how to use the greeks together whien buying/ selling an option ?

[EvilGenius]

The option contract price knows where it is at all times. It knows this because it knows where it isn't. By subtracting where it is from where it isn't, or where it isn't from where it is (whichever is greater), it obtains a difference, or delta.

[cjmor]

Thank you for this it might be niche but gives a ton of value to ur viewers