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To be a successful options strategist over the long-term, it’s important to clearly understand the various types of risks involved with each option spread position that is implemented. That is why it’s essential that the option strategist possess the knowledge and skill of being able to combine the value of the Greeks to create the best possible options spread.

Understanding the relative impact of the Greeks is absolutely indispensable for all of the positions an option trader has in place. For all intensive purposes, there are about six key mathematical relationships out of these Greek variables that need to be mastered. Let’s take a closer look at each of the following Greeks:

• Delta: Change in the price (premium) of an option relative to the price change of the underlying security.
• Gamma: Change in the delta of an option with respect to the change in price of its underlying security.
• Theta: Change in the price of an option with respect to a change in its time to expiration.
• Vega: Change in the price of an option with respect to its change in volatility.

First, the delta of an at-the-money option has smaller deltas and they tend to decrease the farther out-of-the-money you go. Call deltas are positive and put deltas are negative.

Second, when the trader is selling option premium, theta is positive and gamma is negative. This means that the trader is making money through time decay, however price movement is a negative. For instance, if the underlying stock price moves real quickly the profits trying to be generated by selling puts and calls may never be realized. Another factor to be aware of is that increases in the underlying price will cause the overall position to become increasingly delta-short and to lose money. On the other hand, declines in the underlying stock price will cause the position to become increasingly delta-long and to lose money.

A third key relationship is that when the option trader buys options, theta is negative and gamma is positive. This implies that the position would lose money via time decay but price movement is desirable. In this case the trading profits that are trying to be garnered through volatile moves of the underlying stock may never be realized if time decay causes losses. In addition, increases in the price result in the position becoming increasingly delta-long and declines result in the position becoming increasingly delta-short.

Next the option trader must understand that both theta and gamma increase as the position approaches expiration and they are the greatest for at-the-money options. This is important knowledge because if the trader is short at-the-money the stakes are increased due to the fact that the put or call can easily become in-the-money and move point for point with the equity. In this particular scenario it is extremely difficult to adjust quickly enough to handle the situation.

The fifth Greek mathematical relationship is when options are sold vega is negative. If implied volatility increases then the option position will lose money and if it decreases the option position will make money. Also, when the option trader buys options, vega is positive, so increases in implied volatility are profitable and decreases are unprofitable. Finally, vega is the greatest for options that are far from expiration. Vega becomes less of a factor while theta and gamma become more significant as options approach expiration.

All these important mathematical relationships with the Greek variables that have been discussed need to be clearly understood by the option strategist. By doing so it will certainly transform you into a far better options strategist and allow you to respond and adjust appropriately despite what the market may decide to through at you.

Happy Trading.


Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
Visit Jeff’s Forum
Listen to Jeff at www.ProfitStrategiesRadio.com

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