Quote:
Originally Posted by goofyballer
I haven't, so here's a question: what do the Greeks mean?
Beta is a measure of the volatility of stock relative to the market. The market as a whole is defined as having a beta of 1. If a stock has a beta of 1.1, then in the past it has tended to move in the same direction as the market, but on average, 10% more. You can calculate a weighted beta of your portfolio and use that to help with your hedging.
Alpha is a measure of returns delivered by a fund manager in excess of the market.
For options, the delta is, like you said, the change in the option price with respect to the underlying. A rule of thumb is that (for long call options) at the money options have a delta of 0.5, in the money 1>delta>0.5 and out of the money 0.5>delta>0.
Long put options have a negative delta, which we would expect, since if the price falls, they become more valuable.
Gamma is a measure of how much delta changes with respect to the underlying. When the underlying moves, and the option moves from ATM to deep ITM, our delta changes from 0.5 to 1 (for a long call). Gamma tells you about this.
Theta is a measure of the rate of time decay. For long options, it is always negative (as time is working against you). It measures, as one more day passes, by how much value does the option change? NB, theta is not constant, another rule of thumb is that an option loses 1/3 of its time value in the 1st half of its life, and 2/3 in the 2nd half, so time decay accelerates as time to expiry approaches. From this comes the rule buy long term, sell short term.
Vega (or Kappa) is a measure of the options price to changes in volatility i.e. for a 1% change in volatility, how much will my option's value change?
Rho is a measure of the options price to changes in the interest rate. i.e. if interest rates change by 1%, how much will my option's price change?