Options Made Easy: Your Guide to Profitable Trading, Second Edition

Chapter 6. An Introduction to the Greeks

The Greeks are simply sensitivities to options risk characteristics. The names are taken from actual Greek words. To understand why options have sensitivities to various factors, all we have to do is go back to our original definition of an option:

• The right, not the obligation

• To buy or sell an asset

• At a fixed price

• Before a predetermined date

...and then remind ourselves of the seven factors that affect an option’s premium:

1. type of option (call or put)

2. the underlying asset price

3. the strike price of the option

4. the expiration date of the option

5. the volatility of the underlying asset

6. the risk free rate of interest

7. dividends payable and stock splits

If these factors affect the pricing of an option, then it stands ...