The Greeks

This section is a brief overview of the Greeks with an emphasis on the seller's perspective.

Delta

Delta has multiple meanings:

1. How much the option's price changes relative to a change in the underlying's price.

2. The option's equivalent of a position in the underlying (a directional bet).

3. The probability the option expires in-the-money (moneyness describes the relationship between the strike price and the underlying's spot price, or the distance between spot and strike).

Gamma

Delta is not a constant. An option's delta changes as the underlying's price changes. Gamma measures how much delta changes relative to a change in the underlying's price. Option buyers have positive gamma, whereas sellers have negative gamma.

Gamma is highest at-the-money. As expiration approaches gamma increases for ATM options and decreases for ITM and OTM options. On expiration day gamma can cause delta to rapidly change from zero to one (or zero to minus one) and vice versa for ATM options, since there's very little time left to expire ITM.

Theta

Theta represents the time value of an option. It's the extrinsic value of an option, and as each day ticks away the time value decreases a little. That amount is determined by theta. Theta decay is nonlinear and accelerates as expiration approaches for ATM options. ITM and OTM theta decay tends to be more linear.

Vega

Vega measures how much an option's price changes relative to a change in implied volatility. Vega is highest for ATM options and decreases the further strike prices are from the underlying's price. The more DTE an option has the greater the vega.

Vomma

Vomma (or volga, either term being a portmanteau for volatility gamma) is a much lesser-known Greek (and also not nearly as important as the others). It measures how much an option's vega changes as the implied volatility changes.

Rho

Rho measures how much an option's price changes as the risk-free interest rate changes.