Greeks

Greeks are statistical measurements of options. The option pricing model beside spitting out option prices, after inputting volatility, spits out the Greeks.

The Greeks are namely Delta, Gamma, Theta, Vega and Rho. Each with its own personality. Rho is not important.

Each Greeks behave in a certain manner, in a certain fix trend.

Delta
Delta measures how much the theoretical value of an option changes with every $1 change in the underlying stock. Delta is useful in selecting option to mimic stock as close as possible. Note that stock has 100 delta, and 0 Gamma, Theta, Vega and Rho. By mimicking stock, the option has indirectly replace the stock, otherwise known as Stock Replacement Strategy. Its useful if one want to do covered calls but has limited cash to buy an expensive stock. Delta is highest at the front months and reduces with the out months. Within a certain month, ITM option has the highest Delta and reduces towards OTM options. ATM has a delta close to 50, its neither ITM nor OTM, thus bears a Delta of 50. Trumpification graph capture this behavior.Thus to implement a simple Stock Replacement Strategy, buy the Deep ITM calls.

Gamma
Gamma measures how much the delta changes with every $1 change in the underlying stock. Gamma is highest for ATM options and progressively lower as options turn ITM and OTM. Think of it as a bell curve. Center is ATM, the left and right tails are the ITM and OTM. Also, Gamma is highest at the front months. Use Gamma to analyze profit/loss of ones position over a wide range of possible stock prices.

Theta
Theta measures how much the option extrinsic value decay with the passage of time. Also known as Time Decay. Theta is useful to ascertain which options to select for premium collection. Theta display an exponential decay rate near expiration date. While decay is gradual if the option is far from expiration date. Thus selecting front month option is highly favorable, as it captures the most extrinsic value just prior to option decay.

Vega
Vega measures how much the theoretical value of an option changes when volatility changes 1%. Higher volatility means a greater price swings in the stock price, which translates into a greater likelihood for an option to make money by expiration. Vega is highest at ATM options and progressively lowers as options turn ITM and OTM. Options volatility increase towards the out months as there are more time for the option to gain intrinsic value. Thus Vega increase towards the out months. Deep ITM options have very low Vega, thus suitable to select for Stock Replacement Strategy.

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Never sell naked options

Naked options refer to options with are sold/bought without the underlying assets. Why is it not advisable to sell options naked. Reason is that the risk is unlimited while the reward is limited, if done unhedged. Thus there is a off balance here. NEVER EVER SELL OPTIONS UNHEDGED! You will live to regret it.