About Gamma, Vega, Theta, and Rho

Gamma measures the expected rate of change for an option's delta for every 1 point change in the price of the underlying asset. This Greek is used in conjunction with delta to judge to which price the delta may move or change. For example, a delta neutral position that has a high gamma will require more frequent adjustments to maintain a neutral position than a delta neutral position with a lower gamma. For more information, see About Delta.

Vega measures the expected change in the price of an option due to a 1 percentage point increase or decrease in the volatility of the underlying asset. Volatility is a measure of the amount by which an underlying asset is expected to fluctuate in a given period of time. Volatility is generally measured by the annual standard deviation of the daily price changes in the asset.

The volatility of the underlying asset has a major influence on the price of an option, and vega can be used to monitor and anticipate the changes in the underlying asset price to evaluate an option's value over time. Knowing the volatility of an underlying asset, as well having a good estimate of how much it may change over time, is a valuable risk management tool for evaluating option trading strategies.

An option is a wasting asset. Because of this, a portion of an option's value is determined by the time remaining until expiration. Theta measures the amount an option's price will decline due to the passage of 1 calendar day. This value is not linear; in other words, it does not decrease an equal amount each day. The closer to expiration an option becomes, the faster the time value decays. At expiration, the option has no time value, just intrinsic value (the amount that the option is in-the-money).

Although Rho is not as commonly or often used as the other Greeks, it still offers valuable information regarding risk relationship between an option position and the underlying asset.

Rho measures the expected change in the price of the option contract due to a 1 percent increase in the risk-free interest rate. Generally, the risk-free interest rate used for this measurement is the current rate of the 90-day Treasury bills. High interest rates result in slightly higher option contract premiums; lower interest rates suggest lower premiums. Rho is an efficient way to measure exposure to interest rates over the period of the contract.