Delta is the most popular and most relevant because it compares option volatility and underlying volatility. This is a reliable test of implied volatility, at least in the moment. It will vary based on proximity between strike of the option and current price of the underlying, and also on time remaining until expiration. When strike and underlying price are close, you expect volatility to respond more, and of course when farther away, it responds less.
The range of Delta is between a high of +1 and a low of -1. When you are holding long calls, Delta is positive when the underlying rises; if you hold short calls, Delta is a negative factor as the underlying rises. For long puts, Delta is a negative factor if the underlying is declining, and a positive factor if the underlying is rising.
None of this should come as a surprise to anyone who has traded options. Delta is of value, however, when comparing two or more options whose underlying is similar. It allows you to articulate even a subtle difference in volatility.
The Other Greeks
Three other Greeks are worth mentioning. Gamma measures how sensitive Delta is to movement in the underlying. In a sense, Gamma is the Delta of Delta. It addresses the question of the stability in Delta and likely future volatility levels.
When options are in the money, Gamma will be higher; and at-the-money or out-of-the-money Gamma will be lower.
Theta is a measurement of time decay. How rapidly is time value declining? This varies with moneyness of the option and time to expiration, as you would expect. But given identical attributes of two or more options, Theta will not always track. It measures and compares time decay and enables you to determine which options decline quickly.
Vega measures the option’s behaviour relative to historical volatility in the underlying. Although Vega is not an actual Greek letter, it is always included in any discussion of the “Greeks” for options trading. The more time remaining until expiration, the greater the expected impact of volatility on the option’s price, notably when at or close to the money. When options are far from expiration and several points away from current underlying value, historical volatility’s role is likely to be little if any.
Computing the Greeks is complex, but there is a solution. The Chicago Board Options Exchange (CBOE) offers a free calculator to discover the Greeks for any situation. Go to CBOE Option calculator to use this calculator.