I’ve read a few option books.
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Saturday, July 12, 2008

Options Greeks and Position in the Market (Long vs. Short): Summary

DELTA and the position in the market:
* Long calls have positive delta; short calls have negative delta.
* Long puts have negative delta; short puts have positive delta.
* Long stock has positive delta; short stock has negative delta.

Positive delta means that the option’s value will increase when the underlying stock price increases, and will decrease when the stock price decreases (positive relationship).
Negative delta means that the option’s value will increase when the underlying stock price drop, and will decrease when the stock price rises (negative relationship).

For Calls, the value of delta ranges from 0 to 1, whereas for Puts from -1 to 0.
Calls have a positive delta because Call premiums increases when the underlying stock price increases, and vice versa, assuming all other factors remain the same.
In contrast, Puts have a negative delta because the Put option price drops when the stock price goes up, and vice versa.

GAMMA and the position in the market:
* Both long calls and long puts always have positive gamma.
* Both short calls and short puts always have negative gamma.
* Stock has zero gamma because its delta is always 1.00 – it never changes.

Positive Gamma means the delta will increase when the underlying stock price increases, and will decrease when the stock price decrease (positive relationship).
Negative Gamma means the delta will decrease when the underlying stock price rises, and will increase when the stock price drops (negative relationship).

What does “long calls and long puts have positive gamma” mean?
What does “short calls and short puts have negative gamma” mean?
Please refer to the following post for further discussion about this:
Option Greek: GAMMA

THETA and the position in the market:
* Long calls and long puts always have negative theta.
* Short calls and short puts always have positive theta.
* Stock has zero theta – its value is not eroded by time.

Positive theta means that the option value will increase as the time passes, while negative theta means the option value will fall as the time passes.
Therefore, it makes sense that long options have negative theta and short options have positive theta.
If options are continuously losing their time value as days pass, a long option position will lose money because of theta, whereas a short option position will make money because of theta.

VEGA and the position in the market:
* Long calls and long puts both always have positive vega.
* Short calls and short puts both always have negative vega.
* Stock has zero vega – it’s value is not affected by volatility.

Positive vega means the option price increases when volatility increases, and decreases when volatility decreases.
Negative vega means the option price decreases when volatility increases, and increases when volatility decreases.

RHO and the position in the market:
Long calls and short puts have positive rho.
Short calls and long puts have negative rho.

Positive rho means the option price increases when the interest rate increases, and decreases when the interest rate decreases.
Negative rho means the option price decreases when the interest rate increases, and increases when the interest rate decreases.

For more detailed discussion, go to: Option Greeks.

Related Posts:
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* FREE Trading Videos from Famous Trading Gurus

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