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THE OPTIONS COURSE- The Other Greeks

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THE OPTIONS COURSE The  Other  Greeks T o create a delta neutral trade, you need to select a calculated ratio  of short and long positions that combine to create an overall posi tion delta of zero. To accomplish this goal, it is helpful to review a  variety of risk exposure measurements. The option Greeks are a set of  measurements that can be used to explore the risk exposures of specific  trades. Since options and other trading instruments have a variety of  risk exposures that can vary dramatically over time or as markets move,  it is essential to understand the various risks associated with each trade  you place. DEFINING THE GREEKS Options traders have a multitude of different ways to make money by trad ing options. Traders can profit when a stock price moves substantially or  trades in a range. They can also make or lose money when implied volatil ity increases or decreases. To assess the advantage that one spread might  have over another, it is vital to con

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