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Understanding Option Greeks

When determining how options may react to a given change in some of the variable pricing inputs, investors turn to the Greeks for guidance. The most commonly used Greeks are Delta, Gamma, Theta, Vega, and Rho. Greeks are not a guarantee of exact option premium changes, but rather a theoretical guidepost that gives investors an estimate of an option's value when the underlying moves, interest rates or dividends change, time changes, or implied volatility changes. Most pricing models use the following inputs to determine theoretical values and the corresponding Greeks:
  • Stock price
  • Strike price
  • Time to expiration
  • Implied volatility
  • Interest rate
  • Anticipated ordinary dividends
Some of these variables, like implied volatility and stock price, change constantly during market hours while the stock price, interest rate and dividend assumptions may not change at all for the life of the contract. 

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