Options Greeks is a good strategy to use for the estimation of the price of an option. The Greeks can help you determine how much factors like price movement, volatility and time decay can help you determine the price of the option.
The Most Used Options Greeks
This is used to measure the amount an option should move for every 1 point move in the stock price. For example, if the delta is $.5 then the option will move about $.5 for every one point move in the price of the stock.
This measures the change in delta. Gamma tells you how much delta will move for every $1 move in the stock. If the gamma is $.1 for every $1 moves in the stock.
Theta measures the effect of time decay on an option. The options have an expiration date making them depreciating assets. The theta will measure how much value an option loses each and every day. If the theta is $.05 then the option will lose $.05of time value each and every passing day.
When trading options you have to know where your stops are. When will you reach a point when you say that enough is enough and decide it’s high time you exit a position for a small loss before it gets any bigger. Options Greeks help you estimate roughly how much you are risking and how much you may lose if everything turns against you. As a result, you will be able to limit your losses.
This will help you estimate how much you can make if you are right. If you know this ahead of time, you can easily determine whether the trade is worth doing at all. If the returns are not good sized, it is wise to look for another investment.
Helps you understand options
If you are able to estimate the movement of an option when the price of a stock moves, then you can understand options better. This is because of the fact that you can determine high-risk and low-risk options.
An out of the money option is higher risk because the stock could move in the exact direction you want and you may lose money. An in the money option can have a lower risk since it moves closer to a 1 to 1 bases with the stock.