The “Greeks,” as these are commonly referred to, are useful tools to anticipate the behavior of put and call prices in the marketplace, and an introduction to and brief explanation of each follows.
In addition to generating theoretical values for equity option contracts, option pricing models also yield values that reflect an option’s price sensitivity to changes in various quantifiable pricing factors.
Delta – Expected change in option price with a change in underlying stock price
Gamma – Expected change in an option’s delta with a change in underlying price
Theta – Expected change in option price with the passage of time
Vega – Expected change in option price with a change in volatility
Option values generated by pricing models are strictly theoretical, and so are the Greeks. Don’t expect to always see prices for calls and puts in the marketplace perform as predicted by these sensitivities
Instead, for most individual investors it’s more important to understand the theoretical underlying concepts. Familiarization with these concepts will help reduce frustration from unexpected price behavior once a call or put is bought or written.