This guide will break down the five main Greeks in plain English. I’ll show you what they mean, why they matter, and how you can use them to make smarter decisions.
The Interactive Greeks Visualizer #
Before we dive in, play around with the visualizer below. Change the inputs like Volatility or Days to Expiration and watch how the colored lines (the Greeks) react across different stock prices. Seeing it in action is the best way to start building an intuition.
Interactive Greeks Visualizer
Adjust the sliders below to see how each Greek changes as the underlying price moves.
The Five Main Greeks Explained #
Delta tells you how much an option’s price is expected to move for every $1 change in the underlying stock’s price.
Imagine you have a call option with a Delta of 0.40. If the stock goes up by $1, your option’s price will go up by about $0.40. If the stock goes down by $1, your option’s price will drop by about $0.40.
- Calls have a positive Delta (between 0 and 1).
- Puts have a negative Delta (between 0 and -1).
An at-the-money (ATM) option usually has a Delta around 0.50 (or -0.50 for puts), meaning it has a 50/50 chance of finishing in-the-money.
Think of Delta as your directional exposure. A high Delta means your option is acting a lot like the stock itself. A low Delta means it’s less sensitive to the stock’s small moves. It also gives you a rough probability of the option expiring in-the-money.
Gamma measures the rate of change of Delta. It tells you how much an option’s Delta will change for every $1 move in the stock.
Gamma is the acceleration. Let’s say your option has a Delta of 0.40 and a Gamma of 0.10. If the stock price increases by $1, your new Delta will be approximately 0.50 (0.40 + 0.10).
Gamma is highest for at-the-money (ATM) options that are close to expiration. This is where options are the most unstable and can change from worthless to valuable (or vice-versa) very quickly.
Gamma is all about instability. A high Gamma means your directional exposure (Delta) is changing rapidly. If you’re long options (you bought them), high Gamma is great because it accelerates your profits and decelerates your losses. If you’re short options (you sold them), high Gamma is dangerous.
Theta measures the loss in an option’s value due to the passage of time. It’s often called “time decay.”
Theta is almost always a negative number for a single option, and it represents how much value your option will lose every single day, all else being equal. An option with a Theta of -0.05 will lose about $5 (0.05 x 100 shares) of its value overnight.
This decay is NOT linear. It accelerates as the expiration date gets closer, especially in the last 30 days.
Theta is the enemy of the option buyer and the best friend of the option seller. If you buy an option, you have a constant headwind against you. If you sell an option, you’re collecting that decay every day as income.
Vega measures an option’s sensitivity to changes in implied volatility (IV). It tells you how much the option’s price will change for every 1% change in IV.
Implied Volatility is how volatile the market thinks the stock will be in the future. Vega tells you how much your option is worth based on that market “fear” or “excitement.” If you have an option with a Vega of 0.10, and the IV of the stock increases by 1%, your option’s price will go up by $0.10.
Vega is highest for long-term options and at-the-money options.
Vega is your “volatility exposure.” Option buyers love high and rising IV, as it makes their options more valuable (a bigger chance of a large price swing). Option sellers want low and falling IV, as it decreases the value of the options they sold.
Rho measures an option’s sensitivity to changes in interest rates.
Rho tells you how much an option’s price will change for every 1% change in the risk-free interest rate.
Honestly, for most retail traders dealing with short-to-medium-term options, Rho is the least important Greek. The effect is usually very small compared to the other Greeks. It becomes more important for very long-term options (LEAPs).
You can pretty much ignore Rho when you’re starting out. It’s good to know what it is, but it will rarely be the primary driver of your option’s price.
Putting It All Together #
You never look at one Greek in isolation. They all work together:
- Delta & Gamma tell you about your directional risk.
- Theta & Vega are often a trade-off. Strategies that profit from time decay (positive Theta) are usually hurt by a rise in volatility (negative Vega), and vice-versa.
Understanding these relationships is the key to moving from simply buying calls and puts to designing more sophisticated strategies that fit your market view. The best way to learn is to see them in action, so keep playing with the calculator at the top of this page!