By Darrell Martin
As mentioned in other articles in this series, the Greeks are a formula to explain how much the price will move if something else changes like time, implied volatility, price or interest rates. Greeks do not move the price of binaries nor have any impact on the binaries. They are called the Greeks because they are denoted by a Greek letter or symbol. This series of articles seeks to take the complexities out of understanding the Greeks. Understanding the concepts of the Greeks can help you understand how an option changes price.
Theta deals with time. It tells how much the option price will change as time passes. If you liken it to a tire, how much air goes into the tire is the theta, but the pressure is the implied volatility. Implied volatility is the expected movement. How much expected movement is there, that will put more time value in the trade, which is theta.
When looking at two expirations, and the same strike, on a binary price ladder you can see the impact of time on a binary option. If the market is above or below the strike, you will see the option cost more with more time until expiration. In addition, if there is less time until expiration, there will be faster change in price closer to the underlying market price, than a binary with the same strike that has more time until expiration.
Keep theta simple since on Nadex, a binary ranges from 5 minutes to 5 days until expiration. Binary options are deltas of call options (more on that in a different article), and theta is on a delta which can make things seem complex. Theta changes over time. It changes faster as it gets closer to expiration, but it still can rise if implied volatility increases. Theta is more about implied volatility on a market than it is about theta, because you are trading the delta of a call option. The bottom line is, reviewing a binary strike ladder with the same strikes and different expirations, will give you the best understanding of how the price changes over time and with different amounts of time, until expiration.
Rho is the amount the option will increase or decrease in value with a change in a country’s interest rate. It has little to no impact on a binary option due to its short term nature and the rho measurement is not a factor you need to be overly concerned with when trading.