Option Pricing: The Greeks

Last week, Professor Bodie mentioned the "Greeks" when talking about different ratios/calculations that traders use to analyze the prices of options. I decided to do a little more research and found a website that explains them a little further (found here). Click the links on each ratio for more information.

Option Delta: The sensitivity of the option price relative to changes in the price of the underlying asset.

Option Gamma: The sensitivity of an option's delta relative to a one point change in price of the underlying asset. Gamma reaches its peak when the option is at the money.

Option Theta: Shows how much time value the option loses with each passing day assuming everything else remains constant.

Option Vega: Shows how much the price of an option should change as the volatility of the underlying asset changes. Vega is at its peak when the option is at the money.

Option Rho: The change in the option price relative to changes in interest rates. Rho is largest when the option is in the money and decreases as the option moves out of the money. It also decreases as the option gets closer and closer to expiration.