hi i'm jimmy in this video we're going
to look at some of the factors
that affect the price of stock options
known as the option greeks
and i'm going to use gamestop as a real
life example
since i'm sure we can all appreciate
gamestop has been on a crazy ride
recently
okay so let's jump right in and just so
we're all on the same page
let me first quickly define what an
option is and then we'll jump into what
the option greeks are
okay so let's imagine that we're looking
to buy gamestop
and we're going to say the day we're
trying to buy it is december 15th of
2020 and at that time gamestop was
trading at 13.85 cents
so if we wanted to buy 100 shares well
it would cost us
385 dollars now another choice
is for us to go ahead and buy a call
option and basically
a call option is a contract for
us to acquire the option to buy
100 shares of the stock in this case
gamestop
at a predetermined price by a
predetermined
by a predetermined date and what we have
to pay is we have to pay a fee
they call that a premium so on december
15th
well we think gamestop is going to go
way up and we decide to buy
a call option or two or five or ten or
whatever we're going to buy the option
instead of buying the shares
now if we thought the stock was going to
go down well we could buy something
known as the put option
but for this example we're just going to
stick with the call option which means
we in theory make more money the higher
the stock price goes
now i've done a few other videos on
options so if you're curious i'll leave
links to those videos in the description
below but let's imagine
that we decide that we're going to buy a
call option and that option expires on
july 16th of 2021 and don't forget in
this example
it is december 15th so it's about seven
months away from the current
date okay now gamestop at that point was
trading as 13.85 cents
so let's pretend we decide to go and buy
this call option
and that option has a strike price of 20
per share this would cost us this option
on that date would cost us about
and thirty dollars so like i said for
three hundred thirty dollars
we now have the option to buy one
hundred shares of gamestop
at twenty dollars per share either on
or before july sixteenth of twenty
twenty one now obviously this is a crazy
example because we all know what
happened with gamestop
but if gamestop was not above on the
16th of july
when pretend we still own the option and
it's not above 20
per share the stock itself well our
option at the end of that day will
expire worse
worthless so we are risking a hundred
percent of
our investment so clearly there's a ton
of risk here now of course the upside
is that gamestop goes way up and
suddenly our 330
investment on that day i believe i
checked the price of this a little while
ago
and i think that would be worth about 26
000 today and at the time of that quote
the
gamestop was trading at about 280 per
share
now i'm not using this as an example to
show us how we can get rich quick
in fact it's exactly the opposite i
believe that if we're doing things like
this
to try to get rich quick well we're far
more likely to get burnt
than we are to end up in the very rare
example of something like game stuff but
if we want to learn more about options
well this is a good example so that
being said let's now look at the option
greeks
so there are four primary option greeks
there's delta
gamma theta and vega now they also have
rho uh and but the top four really the
most popular ones
rho could be used in some situations but
it's not nearly as popular
so for now i'm just going to leave that
one up so ultimately what
knowing the option greeks do for us is
that helps us be able to
pre to understand better how options get
priced
so we mentioned a moment ago that the
option was trading for 330
dollars per option well where did that
come from where did that price come from
and this is where the option greets come
in that every piece of the option greeks
each one of these
contribute a piece to how the valuation
would come up or how we would come up
with the valuation
for an option now there's a lot of crazy
math that we could do for each one of
these i'm going to leave that out
i'm really just going to focus on the
concept for each of these
but if you want me to do a more in-depth
video on any one of these or all of them
please let me know in the comments below
okay so let's kick it off with delta
so delta shows us the relationship
between
the change in the price of the asset the
underlying asset
in this in our example it's gamestop and
the ch
and the change in the price of the
option so going back with this gamestop
example
i said that the option was going for 330
per share
now if you would go to your actual
broker if we go to our brokerage website
and we look at the quote for this it
would actually say three dollars and
thirty cents
since options are quoted on a per share
basis
but we know that options one option
represents
100 shares so we must multiply that by
100 and that gives us the total contract
price but sticking with the per share
price because i think it makes things a
bit simpler
at the time the stock was trading at
13.85 cents
gamestops option this particular option
was trading for three dollars and 30
cents
per share well what if gamestop's price
the actual price of the stock went up to
14.85
well the option price would not go up by
the same amount it wouldn't go up the
full dollar maybe it goes up
30 40 or 50 cents well the relationship
between the underlying stock price the
movement of the underlying stock price
and the price of the option is delta now
if we're curious
at that time delta gamestop uh this
particular option had a delta
of about 35 now there's a few things we
should be aware of
first the close of the current price
gets to the strike price in our example
it's 20
per share well the higher the the higher
it get the higher the stock price gets
the higher delta will ultimately move so
if the stock goes way in the money
so 20 anything be higher than 20 is
called
being in the money if the stock like it
is right now up at
you know 280 per share well at that
point delta will be
nearly a hundred percent every dollar
move in the stock
will move the option by about the same
exact amount
in our example before was that 1385
jumped to 1485
well that's still out of the money you
could still there's a good chance it
expires worthless
so delta wouldn't be nearly as high now
i should also point out
that with call options well call options
are going to have positive delta
because when the stock price moves
higher the value of the option
will move higher but if we were looking
at put options which is where you make
more money when the stock price goes
down
well put options would have a negative
delta
so the higher the stock price goes the
lower the value of the option goes which
is how you end up with negative delta
okay but either way next up we're
looking at gamma
so gamma is it's a measure of it's
really like a subset
of delta gamma helps us measure how much
delta moves
or how much it moves over time and i
know the first time that i was learning
about the options or the the
option greeks this was a bit confusing
and i didn't fully grasp it
but basically here's the way i look at
it and how i try to remember it
so in our example with gamestop we said
that it's a call option that has a 20
strike price and we know that the higher
the price the stock
goes well the higher that delta will
ultimately be
but like i mentioned before well
gamestop was trading at about 280
dollars
per share right now and delta is at
nearly a hundred percent
well the further in or out of the money
the option goes the lower gamma will be
so gamma will be the highest
right at the strike price and ultimately
gamma is a good number to track
uh it's a good number to track if you
want to better understand how a
particular
option moves relative to the underlying
price so we can
use gamma to track delta and i know
that's a bit confusing
but it could be a very good method to
use for people that trade options a lot
okay next up we have theta and theta is
a good option greek it's a very simple
one
and basically this is a measure of how
sensitive the option price is
relative to the passage of time so
here's what i mean
if we bought a stock option that expired
next week
well clearly that's going to have less
value than if we bought an option that
expires next
year now theta will be a negative number
since
as time time only moves in one direction
since time always moves forward
well the option will gradually lose its
value so theta is going to be a negative
number there's a few
exceptions to that but broadly speaking
theta will be negative
and what we should remember is that
theta is a measurement of time the time
decay
of the option's value okay now on to
vega and vega is a super important one
so vega measures how sensitive the price
of the option is
relative to the volatility of the
underlying stock
so we saw that delta was it measured
how much the price change of the stock
moved the
price value of the option well when
volatility goes up
the value of options generally goes up
and vega measures how much up or down
the value goes relative to a given
change in the
volatility of the underlying stock or
even the expected volatility of the
underlying stock
now here's how we can use this so let's
imagine that we want to sell an option
well maybe we want to sell an option we
want to collect the premium
a lot of people do that sort of
manufacture dividends well that's what
we want to do
it makes more sense to sell the option
on
days where the underlying stock is
highly volatile or expected to be highly
volatile
if we want to buy the option well we
want to buy that option when volatility
is lower
because increased volatility is going to
increase the price
of all options calls and put options so
i'm sure it's obvious that
selling on high volatility days makes a
lot of sense and buying on low
volatility
makes a lot of sense as well now i
recognize that options can be a bit
tricky
and they can be a great tool if we
understand how to use them and use them
properly they can be a great way
to protect our portfolio or try to
generate income things like that
so if you're not 100 sure with how to
use options
well i actually did a video where i went
through a bit more
in detail than i did here trying to
explain the basics of options so if you
were confused by this
maybe you jump over and watch that video
or if you're just curious to learn more
about options
maybe that's a good next video for you
to watch i got a link right here i got a
link in the description below
and thank you so much for sticking with
me all the way to the end of the video
i really really do appreciate it thank
you and i'll see in the next video