How Delta, Gamma, Theta, and Vega Describe Option Price Sensitivity
Summary
This introductory guide explains four option Greeks as model-based measures of how an option’s theoretical price responds to changes in the underlying asset, time, and implied volatility. Delta estimates the price response to a one-dollar underlying move; gamma describes how delta itself changes. Theta estimates the effect of one day passing, while vega estimates the effect of a one-percentage-point change in implied volatility.
The article describes common patterns across strikes: calls have positive delta and puts negative delta, while at-the-money options tend to have the greatest gamma, time decay, and vega. It gives numerical illustrations for delta, theta, and vega, and explains where Deribit displays these values. These are sensitivities, not guaranteed price changes: the examples assume other inputs stay constant, and the Greeks vary as market conditions and time to expiry change. The guide is introductory and does not discuss hedging or strategies that combine Greeks.
Key ideas
- Delta estimates an option’s price response to a move in the underlying asset.
- Gamma measures how quickly delta changes as the underlying price moves.
- Theta estimates the effect of one day of time passing, with option buyers generally exposed to decay.
- Vega measures sensitivity to changes in implied volatility.
- At-the-money options tend to have the largest gamma, theta, and vega.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.