Section 1.1: Delta

Delta measures the change in the price of an option when the underlying asset's price changes by $1. For call options, delta values range from 0 to 1, where a delta of 0.50 suggests a 50% probability of the option expiring in the money. Conversely, for put options, delta ranges from -1 to 0.

For instance, if a call option has a delta of 0.65 and the stock price rises by $1, the option's price will increase by $0.65. If the stock price decreases by $1, the option price will drop by $0.65. Consider a call option for Stock ABC with a strike price of $50, currently trading at $48, having a delta of 0.45. A $1 increase in stock price to $49 would result in the option price rising to $2.45 from $2.00.

In summary, a delta of 0.45 indicates that changes in the call option price will be 45% of the changes in the underlying stock price, illustrating delta's role in measuring price sensitivity.

The first video titled "Before Trading Options Learn The GREEKS | (Delta, Gamma, Theta, Vega, Rho)" offers an overview of these key metrics, providing foundational knowledge for traders.

Section 1.2: Gamma

Gamma indicates how much delta changes in response to movements in the underlying asset's price. Options with a higher gamma are more responsive to price shifts, especially when they are at-the-money.

For example, if a stock is priced at $30 and a call option has a strike price of $35 with a gamma of 0.02, the delta might start at 0.25. If the stock price rises to $31, the delta could increase to 0.27. As the stock continues to rise, the delta could reach 0.45 when the stock hits $34, showcasing how gamma amplifies delta's sensitivity as the option approaches the strike price.

The second video titled "Delta, Gamma, Theta, Vega - Options Pricing - Options Mechanics" delves deeper into the pricing mechanics of options, enhancing your understanding of these vital metrics.

Section 1.3: Theta

Theta measures the rate of time decay of an option. As expiration approaches, theta generally increases, indicating that options lose value over time. Typically, theta is negative, reflecting this depreciation.

For example, an option with a theta of -0.05 will lose $0.05 in value each day. If the option starts at $2.00, after 10 days, the price would decline to $1.55, demonstrating how theta impacts option pricing over time.

Section 1.4: Vega

Vega quantifies an option's sensitivity to implied volatility. As volatility increases, option prices tend to rise. Vega indicates how much the price of an option will change with a 1% change in volatility. For instance, an option with a vega of 0.10 would increase in price by $0.10 if implied volatility rises by 1%.

Section 1.5: Rho

Rho measures sensitivity to interest rates, which is particularly relevant for longer-dated options. Generally, rising interest rates lead to lower call option prices and higher put option prices. Rho captures the change in option price per 1% shift in interest rates.

While the values of rho can vary, they typically range from -0.05 to +0.25 for options with longer durations.