Money Basics · Lesson 10 of 14
Treat the Greeks as Estimates of Sensitivity
Delta, gamma, theta and vega estimate how an option’s price may respond to price, time and volatility. They change constantly and promise nothing.
In this lesson
- Describe what delta, gamma, theta and vega estimate
- Estimate a small change in an option’s price from its delta
- Tell volume apart from open interest
The Greeks are estimates of how an option’s price may respond when one input changes and the others stay put. They’re useful dials, not promises about tomorrow’s option price.
- Delta — estimates how much an option’s price may change for a small move in the underlying asset, with other factors held constant.
- Gamma — describes how delta changes as the underlying price changes.
- Theta — estimates sensitivity to the passage of time.
- Vega — estimates sensitivity to a change in implied volatility.
Example Consider this example
A call with a delta of 0.50 might gain about $0.50 per share for a small $1 stock increase if the other pricing factors stayed unchanged. A standard 100-share contract would change by about $50. The actual result can differ as gamma, time, volatility and market prices change.
They move together
These measures can change quickly and work together. Delta itself shifts as price moves, which is what gamma describes, while time and volatility keep changing too. Don’t multiply today’s delta by a large move and treat the answer as exact.
A hedge is a position intended to offset another risk, but it may introduce costs and risks of its own.
Volume vs open interest
Volume
- Contracts traded during a period, such as today
- Starts from zero each session
- The same contract can trade several times
Open interest
- Contracts still outstanding
- Published once a day
- Generally rises as positions open and falls as they close
Open interest counts outstanding option contracts, while volume counts contracts traded during a period. Because a contract can trade several times, high volume doesn’t automatically mean the same number of new positions were opened.
Note
Open interest is one input StratosHedge uses to estimate where the Ceiling and Floor sit. You’ll meet those levels in the Read the Map track.
Check your understanding
4 questions. Answer each one, then open “Show answer” to compare.
Show answer
Answer: C. Theta
Theta describes time decay. For most bought options it’s negative: with everything else unchanged, the option loses a little value each day.
Question 2 of 4 A call has a delta of 0.40. If the stock rises $1 and nothing else changes, about how much does one standard contract’s value change?
dollarsShow answer
Answer: 40 dollars.
0.40 × $1 × 100 shares ≈ $40. It’s an estimate: gamma, time and implied volatility will change the real result.
Show answer
Answer: False.
Volume counts trades, and the same contract can change hands several times. Some trades also close existing positions. Open interest, published the next day, shows how many contracts remain outstanding.
Show answer
Answer: A. How fast delta changes as the underlying price moves
Gamma is the rate of change of delta. When gamma is high, delta, and so the option’s price sensitivity, can shift quickly.
Key takeaways
- Delta, gamma, theta and vega are estimates that change as the market changes.
- Delta × $1 × 100 roughly estimates one contract’s change for a small $1 move.
- Volume counts trades; open interest counts contracts still outstanding.
Key terms
- The Greeks
- Measures of how an option’s price responds to changes in price, time, volatility and interest rates, named mostly after Greek letters.
- Delta
- How much an option’s price changes for a $1 move in the underlying. A 0.50 delta call gains about $0.50 per share ($50 per contract) on a $1 rise.
- Gamma
- How fast delta changes for a $1 move in the underlying. It’s largest for at-the-money options close to expiration.
- Theta (time decay)
- How much value an option loses each day from time passing, with everything else unchanged. Long options usually have negative theta.
- Vega
- How much an option’s price changes for a 1-percentage-point change in implied volatility.
- Hedge
- A position taken to offset risk in another position, such as buying a put to protect shares you own.
- Open interest (OI)
- The number of option contracts still open at a strike, not yet closed, exercised or expired. It’s published once a day.
- Volume
- How many shares or contracts traded during a period. Rising volume shows more participation behind a move.
Sources and further reading
Progress is saved in this browser only.
Educational content, not investment advice. Lessons describe how markets and models tend to behave. They don’t tell anyone what to buy, sell or hold. Interactive examples use illustrative sample data, and simulator results are simulated — not actual trading. Options involve risk and are not suitable for all investors.
Risk disclosureCharacteristics and Risks of Standardized Options (OCC) (opens in a new tab)