Back to course

Sensitivity Greeks

The Greeks are partial derivatives of an option's price. In practice they are the language a desk uses to describe its risk.

Delta

Δ=∂V∂S\Delta = \frac{\partial V}{\partial S}

Sensitivity to the underlying. Calls run 0 to 1, puts −1-1 to 0.

Three readings, all used:

  • Hedge ratio. Delta 0.6 means 60 shares hedge 100 options.
  • Equivalent position. A 0.6-delta call behaves like 60 shares for small moves.
  • Approximate probability of finishing in the money.

Gamma

Γ=∂Δ∂S\Gamma = \frac{\partial \Delta}{\partial S}

The rate at which delta changes, and therefore how unstable your hedge is. Highest at the money and near expiry.

Select gamma and shorten the expiry: the peak at the strike grows sharply as the option approaches expiry, which is why a book that is comfortable on Monday can be unmanageable on expiry Friday. Select vega and do the same, and it moves the other way.

The rest of this lesson is for subscribers

Unlock every lesson in Asset Classes and Trading Products, and every other premium course.

Subscribe to continue

Test your knowledge

Questions are only available to subscribers.
Continue
NextOptions Hedging

Keep reading Asset Classes and Trading Products

48 lessons in this course, and every other premium course, on one subscription.

Subscribe now
  • Every lesson in all seven courses, with the worked examples and interactive simulators
  • Graded questions on every lesson, with explanations for the wrong answers as well as the right one
  • The trainers, timed assessments and brainteaser library that go with them