OptionsGreeks - Options Greeks By John Summa, CTA, PhD,...

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(Page 1 of 30) Copyright © 2002, Investopedia.com - All rights reserved. Options Greeks By John Summa , CTA, PhD, Founder of OptionsNerd.com http://www.investopedia.com/university/option-greeks/default.asp Thanks very much for downloading the printable version of this tutorial. As always, we welcome any feedback or suggestions. http://www.investopedia.com/contact.aspx Table Of Contents 1) Option Greeks: Introduction 2) Option Greeks: Options and Risk Parameters 3) Option Greeks: Delta Risk and Reward 4) Option Greeks: Vega Risk and Reward 5) Option Greeks: Theta Risk and Reward 6) Option Greeks: Gamma Risk and Reward 7) Option Greeks: Position Greeks 8) Option Greeks: Inter-Greeks Behavior 9) Option Volatility: Conclusion Introduction Trading options without an understanding of the Greeks - the essential risk measures and profit/loss guideposts in options strategies - is synonymous to flying a plane without the ability to read instruments. Unfortunately, many traders are not option strategy "instrument rated"; that is, they do not know how to read the Greeks when trading. This puts them at risk of a fatal error, much like a pilot would experience flying in bad weather without the benefit of a panel of instruments at his or her disposal. This tutorial is aimed at getting you instrument rated in options trading, to continue the analogy with piloting, so that you can handle any strategy scenario and take the appropriate action to avoid losses or enhance gains. It will also provide you with the tools necessary to determine the risk and reward potential before lift off. When taking an option position or setting up an options strategy, there will be risk and potential reward from the following areas:
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Investopedia.com the resource for investing and personal finance education. This tutorial can be found at: http://www.investopedia.com/university/option-greeks/default.asp (Page 2 of 30) Copyright © 2008, Investopedia.com - All rights reserved. Price change Changes in volatility Time value decay If you are an option buyer, then risk resides in a wrong-way price move, a fall in implied volatility (IV) and decline in value on the option due to passage of time. A seller of that option, on the other hand, faces risk with a wrong-way price move in the opposite direction or a rise in IV, but not from time value decay. (For background reading, see Reducing Risk With Options .) Interest rates , while used in option pricing models, generally don't play a role in typical strategy designs and outcomes, so they will remain left out of the discussion at this point. In the next part of this tutorial, the role interest rates play in option valuation will be touched on in order to complete the overview of the Greeks. When any strategy is constructed, there are associated
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This note was uploaded on 05/17/2010 for the course BUS 001 taught by Professor Gra during the Spring '99 term at American University in Cairo.

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OptionsGreeks - Options Greeks By John Summa, CTA, PhD,...

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