When people first start trading options, they may see some words and literally say, “That’s all Greek to me!”

The names of Greek letters might seem confusing at first, but they offer valuable information that can help traders determine how they want to respond to options. The following list introduces three of the most common Greeks (theta, delta, gamma) and explains what they mean.

## Theta

Theta almost always appears as a negative number because it represents an option’s eroding value over time. As time advances, the theta will increase because opportunities to earn money decrease. Of course, the amount of value that the option loses over time is theoretical.

Trading software can help investors make informed decisions, but no one can truly know the value of an option in the future. Generally speaking, a low theta (-0.10, for example) means that the option will lose a relatively small amount of value per day. What actually happens depends on how the asset moves as you get closer to the expiration.

## Delta

Delta represents how much an option should decrease or increase based on its underlying asset. Calls have positive deltas between 0 and 1. Puts have negative deltas between -1 and 0.

The distance of the underlying asset’s value to it being in-the-money or out-of-the-money influences the delta. Imagine someone with a call option on Stock A with a $10 strike price. Sixty days before the call option expires, the price sits right at $10. At this point, the buyer probably has an even chance that the value will go up or down. That would make the delta 0.5. If the value starts to increase, the delta also increases.

## Gamma

Traders often use delta and gamma to determine how they should react to options. Both measurements come from comparing the option’s price to the underlying asset’s value. When an option is at-the-money, it will have a high gamma. The gamma measurement falls the further it gets from being at-the-money.

Gamma becomes fairly difficult to measure because it depends on knowing the delta first. Basically, the gamma is equal to the change in the delta’s price after a single-point move. Since gamma is derivative of the delta, traders need accurate deltas before they can rely on gamma to make decisions.

## A Good Trading Strategy Makes a Huge Difference

Every options trader needs a good strategy based on the Greeks. No one can base all of their decisions on simple numbers, though. Success requires insight and experience. Think about what it’s like in the military. Yes, soldiers rely on intelligence to guide them. But they also need gut instincts, which are refined through weeks of training, multiple tours of duty, and learning from real-world situations. Everything involves risk. That’s why you need a combination of intelligence and instinct to thrive.

Learn from experienced traders and develop the skills you need to make independent decisions that lead to greater wealth. Become a member of Altitude Life today!