I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Saturday, July 5, 2008

Options Greeks vs. OTM, ATM & ITM Options: Summary

1) Option Greeks: DELTA
Delta is a measure of the change in the option price resulting from a change in the underlying stock price.

The delta values will be positive for Calls & negative for Puts.

At-the-money (ATM) options have (absolute) deltas around 0.5.
Out-of-the-money (OTM) options have (absolute) deltas between 0 to 0.5.
In-the-money (OTM) options have (absolute) deltas between 0.5 to 1.




2) Option Greeks: GAMMA
Gamma is a measure the rate of change of delta due to a one-point change in the price of the underlying stock.

Unlike delta, gamma is always positive for both Calls and Puts.

Gamma is the highest for the ATM options, and gradually gets lower as it moves furthers towards ITM and OTM.
That means that the delta of ATM options changes the most when the stock price moves up or down, as compared to ITM & OTM options.

3) Option Greeks: THETA
Theta is a measure of the rate of decline of option’s time-value resulting from the passage of time (TIME DECAY).

Theta is typically highest for ATM options, and is progressively lower as options are ITM and OTM.
This makes sense because ATM options have the highest time value component, so they have more time value to lose over time than an ITM or OTM option.

4) Option Greeks: VEGA
Vega is a measure the sensitivity of an option’s price to changes in Implied Volatility (IV).

Vega is highest for ATM options, and is gradually lower as options are ITM and OTM.This means that the when there is a change in volatility, the value of ATM options will change the most. This makes sense because ATM options have the highest time value component, and changes in Implied Volatility would only affect the time value portion of an option’s price.




For more detailed discussion, please refer to the following post:
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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