It is important for the active option trader to become familiar with delta, gamma, theta, and vega characteristics, since he may need to make quick decisions about trading strategies and risk management, decisions which might well determine his financial fate. The following is a summary of these characteristics:
Deltas range from zero for far out-of-the-money call to 100 for deeply in-the-money call, and from zero for out-of-the-money puts to – 100 for deeply in-the-money puts.
At-the-money calls have deltas of approximately 50, and at-the-money puts approximately – 50 .
As time passes, or as we decrease our volatility assumption, call deltas move away from 50, and puts deltas away from – 50. As we increase our volatility assumption, call deltas move towards 50, and put deltas towards -50 .
At-the-money options have greater gammas than either in-or out-of-the-money options with otherwise identical contract specifications.
As we increase our volatility assumption, the gamma of an in-or out-of-the-money option rises, while the gamma of an at-the-money option falls. As we decrease our volatility assumption, or as time to expiration grows shorter, the gamma of an in – or out-of-the-money option falls, while the gamma of an at-the-money option rises, sometimes dramatically.
At-the-money options have greater thetas than either in-or out-of-the-money options with otherwise identical contract specifications.
The theta of an at-the-money option increases as expiration approaches.
A short-term, at-the-money option will always decay more quickly than a long-term, at-the-money option.
As we increase (decrease) our volatility assumption, the theta of an option will rise (fall). Higher volatility means there is greater time value associated with the option, so that each day’s decay will also be greater when no movement occurs.
At-the-money option have greater vegas than either in-or out-of-the-money options with otherwise identical contract specifications.
Out-of-the-money options have the greatest vega as a percent of theoretical value.
The vegas of all options decrease as time to expiration grows shorter.
A long-term option is always more sensitive to a change in volatility than a short-term option with otherwise identical contract specifications.
The vega of an at-the-money option is relatively constant with respect to changes in volatility. if we raise or lower volatility, the option’s vega is unlikely to change significantly.