Option Greeks Explained - COMPLETE BEGINNERS GUIDE (Part 4)

[Music] you learned that option prices are affected by three factors on a daily basis underlying stock price time to expiration and the implied volatility of the underlying stock but here's the question how sensitive will an option's price be to each of these factors if the stock goes up by one point how much will you make on that call option that you own if five days pass how much money will you lose to time decay if volatility drops by 10 percent how much will the options price change all of these questions can be answered by what we call option greeks option greeks give us an idea of how an options price will react to changes in the underlying stock price time to expiration and the volatility of the underlying stock they are simply used to measure an options price sensitivity to each of these factors these option greeks are important to learn and understand because they actually help us choose which strike prices and expirations to select when placing trades and they also help us understand our risk which is crucial to successful trading there are four main option greeks delta gamma theta and vega let's first talk about delta delta is a measure of how much an options price will change in value if the underlying stock price goes up by one point so if an option has a delta of 65 cents then that would mean if the stock goes up by one point then the option contract will go up by 65 cents and actually let me just show you a real example we can find delta as well as all of the other option greeks on the option chain by clicking layout then clicking delta gamma theta vega now we can see all of these option greeks for each of these option contracts you'll notice that all the call options have a positive number for delta and the put options have a negative number for delta this is because delta tells us how much an options price will change if the underlying stock price goes up by one point so if the stock price rises by one point the calls will go up in value hence the positive number and for puts if the stock price rises by one point the puts will go down in value they will change by a negative number now let's just look at one of these options as an example it doesn't matter which one so we'll just choose the 123 strike call you can see the delta is 47 cents this is telling us that if the stock price goes up by one dollar then this option contract should go up by 47 cents this is important to know because if you own one contract of this call option then that tells you that if the stock goes up by one point you should make 47 dollars simple enough delta is the amount by which an option will change in value if the stock goes up one point now here's the thing about delta it is not a fixed number as the stock moves around delta will actually change and it will change by the value of gamma let's talk about gamma gamma is the amount by which delta will change if the stock moves up one point so for this option you can see the gamma is 5 cents what this means is if the stock goes up one point then the delta which is currently at 47 cents will increase by 5 cents so the delta would go from 47 cents up to 52 cents now don't worry yourself too much with gamma at this point in your trading education we actually don't even look at gamma much when making trading decisions it's more just about understanding the concept and understanding that delta will constantly be changing what's important for you to know right now is that as an option becomes more and more valuable its delta will be increasing let me explain what i mean by that let's look at the option chain again so you can see all of these option contracts you can see that the further in the money an option is the bigger its delta is and as we go out of the money you can see that the delta gets smaller so for gamma that's all you really need to understand for now delta will grow bigger as an option gets more and more valuable okay so you just learned about delta and gamma these are the two option greeks that help us understand how an options price will be affected by changes in the underlying stock price now let's move on and talk about theta theta is the measure of an option sensitivity to time theta is the amount by which an option's price will change if one day passes so for example the option you are looking at has a theta of negative 12 cents so if one day goes by then this option's price will lose 12 cents due to time decay now keep in mind this doesn't mean that this option will for sure be 12 cents lower tomorrow because remember all three of these factors will affect an option's price each day what this does mean is that if the stock's price doesn't move and implied volatility doesn't change then the options price should be 12 cents lower than it is now now let's look at the option chain again you'll notice that all of these options have a negative value for theta this is because as each day passes all of these options are going to decay time value is constantly being sucked out of all options so anytime you buy an option contract you're going to be fighting this time decay so again theta is the amount by which an option's price will change if one day passes now there's one more option greek and it's called vega vega estimates how much an options price will change if the underlying stock's implied volatility changes to be specific an options price will change by the amount of vega if implied volatility goes up by one percent so looking at this option you can see that its vega is 10 cents this simply means that if the underlying stocks implied volatility goes up by one percent then the options price will increase by 10 cents if we look at the option chain again you'll see that the vega is a positive number on all of these options both calls and puts this is because an increase in implied volatility will cause all options to get more expensive okay so those are the four main option greeks we look at delta is the amount by which an options price will change if the underlying stock price rises by one point gamma is the amount by which an option's delta will change if the underlying stock price rises by one point theta is the amount by which an option's price will change if one day passes and vega is the amount by which the option's price will change if the underlying stock's implied volatility rises by one percentage point we talked about how each of these greeks will give you an idea of what an options price will do as each day passes and the underlying stocks price and implied volatility move around but the cool part is we can also view our position greeks let me show you what i'm talking about let's check out our current position in ticker symbol spx which is the s p 500 index let's check out the position greeks and see what they are telling us you can see the delta on this position is negative 8.98 this means that if spx goes up by one point then the pnl of this position will change by negative 8.98 so if our p l changes by negative 8.98 then that means we will lose 8.98 from where the trade currently is we're already up 425 on this position so if the spx goes up by one point then in theory we would lose 8.98 of that so now we would only be up around 416 on the flip side this is saying that if spx goes down by one point then we will make 8.98 this is because the delta is a negative number and that's one cool thing about viewing the delta of our position is that it tells us if we are long or short the underlying stock in this case our delta is negative so we are short spx and we want the underlying market to go down so a negative delta indicates that you are short the underlying market and want it to go down and a positive delta would indicate that we are along the underlying market and would benefit from the price going higher another cool thing about looking at the delta of our position is that it tells us our directional exposure and we can make sure that that number is in line with our risk tolerance if this number is bigger than that means we are more exposed right in this case we traded 10 contracts and our delta is negative 8.98 but let's say we traded 100 contracts on this trade instead of just 10. this number would be around negative 80 instead of just negative eight if this were the case and spx went up by one point then we would lose eighty dollars on the position so delta is a good way to measure risk and keep in mind i said it's a good way not the only way now a delta of negative 8.98 is actually not that much it's almost insignificant and that's really just the nature of the iron condor strategy and that's why the strategy is so powerful because we can let the trade make money from time decay and volatility and remove stock price from the equation as much as possible since predicting stock prices is very difficult that's kind of beside the point right now and again you're going to learn about this strategy soon but for now just understand that this delta is saying that if spx goes up by one point then the position should lose 8.98 from its current state so one last thing about delta before moving on how do you know if a delta is big or small well really it's subjective and it depends on your risk tolerance and account size but for any of you who might have a history of trading stocks one way i like to look at it is this option position is the equivalent of being short eight shares of spx now i realize spx isn't a stock it's an index and the index itself isn't tradable but you get the point your delta basically tells you the equivalent number of shares you are long or short of the underlying market right if you are long 50 shares of a stock for example then your delta would be plus 50 because if the stock went up by one point then you would make 50 dollars so if your option position shows a delta of negative 10 for example then that's the equivalent of being short 10 shares of the underlying stock or market now of course this delta that you see can change and it will change by the amount of gamma so in the case of this particular trade if spx goes up by one point then our delta will go from negative 8.98 to negative 10.57 don't get too hung up on gamma again it's really not something we look at much and it's more just about understanding that your delta will change as the stock moves around which can increase or decrease your directional exposure so again gamma is the amount by which your delta will change if the underlying market goes up by one point now just a second ago we mentioned that all options have a negative theta because all options are constantly decaying as time passes but if you look at our position theta you can see that the number is positive what this means is that this position is benefiting from time decay or in other words for each day that passes this one position is bringing in 72.63 from time to k this is pretty cool because all the strategies we use here at skyview trading benefit from time decay making sure you are on the right side of time decay is extremely important so again looking at position theta will tell you how much your p l will change due to one day passing now the last option greek we'll talk about on this position is vega you can see that the vega on this position is negative 176.78 this means that for every percentage point that implied volatility goes up we will lose 176 dollars and inversely for every percentage point that implied volatility goes down we will make 176 dollars so alright guys hope you enjoyed the video if you did make sure to click the like and subscribe button below and also be sure to check out our three free video series by clicking the link in the video description below these videos will help your trading tremendously and they are completely free all you have to do is click the link input your email and we will send you the three videos so i will see you there [Music]

Channel: Sky View Trading

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Keywords: Sky View Trading, SkyView, options trading, how to trade options, options trading 101, options trading explained, options for beginners, Option greeks for beginners, Option greeks 101, Option greeks, Option greeks explained, Options greeks for beginners, Options greeks 101, Options greeks, Options greeks explained, Options delta, Options theta

Id: NxBUYBoA0zI

Length: 14min 11sec (851 seconds)

Published: Tue Sep 07 2021