“Options Greeks” are tools that investors use to measure option prices. They use Greek alphabets, Delta, Gamma, Theta, Rho and the exception Vega which isn’t a Greek alphabet.

Option Greeks measure aspects of risk associated with holding long (buy) or short (sell) positions in option contracts. These measures allow option investors to interpret the amount of risk they are subject to when holding a particular option position.

Option premiums don’t always move with a stock’s trend. In fact, there are several important variables that determine how an option is priced. Therefore it is important to have an in-depth understanding of what influences an option premium, as well as the role these influences play throughout the course of various option strategies.

DELTA
Measure of an option’s sensitivity to a $1 change in the underlying asset. All else being equal, an option with a 0.50 delta for example, would gain 50 cents per $1 move up in the underlying asset.

An options delta ranges from -1.00 to +1.00 in value. This means delta can be positive or negative, depending on whether an investor has purchased or sold a call (also for sold or purchased a put).
ITM – In the Money

An option whose premium contains “real” value, i.e., not just the time value. For calls, it’s any strike lower than the price of the underlying equity. For put, it’s any strike that’s higher.
OTM – Out of the Money

An option whose premium is not only all “time” value, but the strike is away from the underlying equity. For calls, it’s any strike higher than the underlying. For puts its any strike that’s lower.

The Figure shows the Delta variation for a long put whose strike price is $105. At the money (ATM) the delta is 0.5 and in the money (ITM) the delta goes toward 1. Out of the money (OTM) the delta goes toward zero. The variation of delta with time is also shown. The closer an option’s delta approaches a value of 1.0, the more the option moves with the stock price.

Delta is also influenced by implied volatility changes. A decrease in implied volatility causes an ITM option’s delta move closer to 1.0, while an OTM option’s delta moves closer to zero. The inverse is true with rising volatility. As the trade nears expiration, an option’s extrinsic value decays at a faster rate. Therefore with less time attached to the options, delta values naturally increase. This means the trade becomes more sensitive to stock price movement.

Delta can also be applied to the entire portfolio which tells what directional move can create benefit or loss for your portfolio. A positive number means the portfolio is bullish and larger the number the more bullish is your portfolio. A negative number means the portfolio is bearish.

Delta can also be used as a rough approximation of an option’s probability of expiring ITM. If you bought a call option with a delta of 0.1, the probability of ITM at expiration is 10%

Overall, an option’s delta tracks how a change in the stock’s price changes the option’s price.
We will explore Gamma, theta, rho and vega latter.

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