Chapter 5
The Greeks
The Forces That Influence Options’ Prices
Trading often appeals to impulsive people, to gamblers, and to those who feel that the world owes them a living. If you trade for the excitement, you are liable to take trades with bad odds and accept unnecessary risks. The markets are unforgiving, and emotional trading always results in losses.
—Alexander Elder Trading for a Living
Now that you have learned the basics, I will explain the Greeks. The Greeks give you an explanation for the changes in the prices of options and can help you make profit-and-loss forecasts moving forward in time and price in the underlying stock. Some are more important than others, but all should be understood, at least on a basic level before you begin to trade with real money.
This chapter not only defines what they are and how to use them in simple terms, but offers you a view of the Greeks from a professional’s eyes. After reading this chapter, you should understand what market forces influence option prices, and it allows you to grasp the behavior of all the strategies we discuss in Chapter 6 and helps you select the most appropriate one to utilize.
DELTA
For the beginner options trader, delta is probably the most important Greek to understand. Delta is the Greek letter that options traders use to symbolize and measure the change in the price of an option for a $1 change in the price of the underlying security (stock, ETF, index, etc.). There are other ways to use delta, which we ...
