Each Greek letter measures a different dimension to the risk in an option position. These are used by traders who have sold options in the market. Aim of traders is to manage the Greeks in order to manage their overall portfolio.
Delta (△)
In general delta (△) of a portfolio is change in value of portfolio with respect to change in price of underlying asset. Delta of an option on the other hand is rate of change of the option price with respect to price of the underlying asset.
The △ of a call is always positive and the △ of a put is always negative. As the stock price (underlying asset) changes delta of the option also changes. In order to maintain delta at the same level a given number of stocks (underlying asset) need to be bought or sold in the market. Maintaining delta at the same level is known as delta neutrality or delta hedging.
Gamma (Γ)
Γ is the rate of change of the option‘s Delta A with respect to the price of the underlying asset. In other words, it is the second derivative of the option price with respect to price of the underlying asset.
Theta (Θ)
Θ of a portfolio of options, is the rate of change of the value of the portfolio with respect to the passage of time with all else remaining the same. Θ is also referred to as the time decay of the portfolio. Θ is the change in the portfolio value when one day passes with all else remaining the same. We can either measure Θ ―per calendar day‖ or ―per trading day‖. To obtain the per calendar day, the formula for Theta must be divided by 365; to obtain Theta per trading day, it must be divided by 250.
Vega (v)
The vega of a portfolio of derivatives is the rate of change in the value of the portfolio with respect to volatility of the underlying asset. If v is high in absolute terms, the portfolio‘s value is very sensitive to small changes in volatility. If v is low in absolute terms, volatility changes have relatively little impact on the value of the portfolio.
Rho ( ρ ) The ρ of a portfolio of options is the rate of change of the value of the portfolio with respect to the interest rate. It measures the sensitivity of the value of a portfolio to interest rates.
