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Key Concepts Portfolio Management

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Option Greeks

There are a lot of moving parts with options, but luckily, we have the greeks to help us parse the information the market is giving us. At tastytrade, we mainly focus on five main greeks - Beta, Delta, Gamma, Theta and Vega. Each have a different meaning and importance, but understanding them holistically helps us analyze our portfolio and position risk. Greek values in options trading are extremely important, as they allow us to have a mathematical understanding of our positions as well as gauge our true risk.

Beta is the greek that allows us to weight our current positions with a designated benchmark. At tastytrade, we usually beta weight our positions to SPY, which is an extremely liquid product that emulates the S&P 500 index. It is important to note that beta statistics are calculated from five years of data, and the data is ever evolving. Click here to learn about Beta & Beta weighting in depth.

Delta is the rate of change of the option price with respect to the price of the underlying. Deltas can be positive or negative. Deltas can also be thought of as the probability that the option will expire ITM. Having a delta neutral portfolio can be a great way to mitigate directional risk from market moves. Click here to learn about Delta in depth.

Gamma is the rate of change in the delta of an option. Gamma values are largest in ATM options, and smallest in ITM and OTM options. Gamma sensitivity exponentially increases as expiration nears. Gamma is important to keep in mind when hedging deltas because low gamma positions require less maintenance than high gamma positions. Click here to learn about Gamma in depth.

Theta measures the rate of change in an options price relative to time. This is also referred to as time decay. Theta values are negative in long option positions and positive in short option positions. Initially, out of the money options have a faster rate of theta decay than at the money options, but as expiration nears, the rate of theta decay for OTM options slows and the ATM options begin to experience theta decay at a faster rate. This is a function of theta being a much smaller component of an OTM option's price, the closer the option is to expiring. Click here to learn about Theta in depth.

Vega is the greek metric that allows us to see our exposure to changes in implied volatility. Vega values represent the change in an option’s price given a 1% move in implied volatility, all else equal. Click here to learn about Vega in depth.

Option Greeks Videos