By Darrell Martin
Delta might be the most well known of the Greeks. Perhaps it is not understood, but traders have heard of it. But what is Delta? This article will define Delta in easy-to-understand English.
In the Greek alphabet, Delta is the fourth letter. In the Greek numerical system, it has a value of four. In the financial markets, Delta is the amount the option will decrease or increase in value for a one-point/dollar move in the underlying market.
If the stock moves a $1.00 and the delta is .50, then the option would gain 50 cents per option for a $1.00 up move in the stock or lose 50 cents for a $1.00 down move. This is when buying a call option. It would be reversed if buying a put option.
When trading Nadex spreads and understanding Delta, it is important to understand that there are two strikes on a spread. On each of these levels, Delta will be 50. Delta will be 50 at the floor and 50 at the ceiling. As the market approaches the floor or the ceiling from the center of the spread, Delta gets closer to 50. Delta gets less than 50 as it goes outside of the floor or the ceiling.
If a spread’s price is Near The Market (NTM), Delta can be closer to 100. This does not have to be in the center of the spread. It may be a NTM spread at any price, depending on how much Vega and Theta are in the premium of the spread. This can be anywhere between the floor and the ceiling, even ticks away from these boundaries.
The price changes at a slower rate the further it is from the center of the spread. However, Delta can be overridden by implied volatility.
Gamma is the third letter in the Greek alphabet and in the system of Greek numerals, it has a value of three. By definition in trading, Gamma is the Delta of the Delta. It is the amount the Delta will change after each one-point move in the underlying market.
For example, if Delta is .50 and Gamma is .10, then when the underlying market moves up $1.00, the new Delta will be .60. If the underlying market moves up another $1.00, the new Delta will be .70. Returning to the original example of Delta being .50, if the underlying market moved down $1.00, the new Delta would be .40. If it moved down another $1.00, Delta would then be .30, etc. However, this is for buying a call option. It would be reversed if buying a put option.
Be aware of the Greeks, but know that Theta is the price of your Gamma. The more time there is to expiration, the slower it moves. If there is less Theta, there will be more Gamma. Faster Delta gets to full speed. Implied Volatility can override Gamma.
In the Greek alphabet, Rho is the seventeenth letter and has a value of 100 in the Greek numeral system. When trading options, it is representative of the rate of change of a portfolio in regards to interest rates. It is the amount the option will increase or decrease in value with a change in a country’s interest rate.
When trading spreads, this pertains to one day with an interest rate of zero to two percent divided over the course of an entire year. It has little to no impact on daily expirations. This is the least important Greek. Most traders do not even worry about it.
This series was a basic overview of how the Greeks apply to trading Nadex spreads. For free trading education, visit www.apexinvesting.com.