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THE GREEKS OF OPTION

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THE GREEKS OF OPTION Purchasing a stock has an obvious risk/reward profile. If the stock goes up, you make money: If it goes down, you lose money. The reverse is true if you sell a stock short. We refer to this loss exposure as directional risk (refer to Graph ) . Furthermore, the amount of the profit or loss is easy to anticipate. If you purchase 100 shares of XYZ, for each $1 increase in price the position increases in value by $100, and for each $1 reduction in price, the position loses $100 in value. If you sell 100 shares of stock short, for each $1 decrease in price you will make $100, and you will lose $100 for each $1 increase in price. By contrast, determining the risk/reward profile of an option position is much more complicated. As we have seen, an option's value can be affected by a change in anyone of these five variables : * Stock price * Time until expiration * Volatility * Interest rate * Amount and timing of dividends When two or more of the