Trading options without an understanding of the Greeks is like flying a plant without knowing how to read the instruments. Throughout this tutorial, we have tried to explain how to read the instruments without going into great detail about how they are manufactured or operate.
Greeks and Options Prices
The three most important Greeks – Delta, Vega, and Theta – were explained in terms of how they relate to option prices. We also covered how Gamma can be used to provide additional insight into Delta by showing its change over time. And, we discussed how calls and puts can have either negative or positive Greeks depending on whether they were short or long positions, while combinations of options could create position Greeks.
Practice Makes Perfect
In the last section, we covered how to drop the ceteris paribus assumption that separates theory from practice and see how Greeks change when other things don’t remain the same. We focused on a handful of avenues for exploration and provided the basic tools that you need to know to uncover additional relationships on your own.
With enough practice, you will develop an understanding of the Greeks and how they relate to each other and various option strategies. The analysis of Greeks will eventually become second nature so that the analysis only becomes necessary to calculate exact numbers when trading large lot sizes.
The key is to trade smart, start slow, risk little, and increase risk over time as you begin to achieve success with smaller positions.