The options greeks (often just known as the greeks) are a series of values that represent various relationships between options (and warrants) and their underlying markets. The options greeks are so called because they are identified by greek letters (e.g. delta or Δ).
The options greeks are used by options traders in a variety of different ways, but are generally associated with risk management. The options greeks are therefore sometimes known as the risk measures or hedging parameters.
Sensitivity Information
The options greeks provide a variety of information about the sensitivity of options with regard to price changes in their underlying market. In other words, how closely will an option track its underlying market, and how much will the option's price change as the underlying market's price changes.
It is a common misconception among new options traders that options track their underlying markets directly (i.e. a one point price change in an underlying market corresponds to a one point price change in its options). Options do track their underlying markets, but not directly, and the level of tracking varies significantly over the life of an option.
How the Greeks are Used in Trading
The most commonly used greeks are the first order derivatives delta (Δ), theta (Θ), vega (v, but not actually a greek letter), and rho (ρ), and the second order derivative gamma (Γ). These are the greeks that provide the sensitivity information that is most often used by options traders, and traders who trade options as a way of trading their underlying markets.
An example of one of the most useful greeks is delta (Δ). Delta (Δ) represents the rate of change of an option's price in relation to its underlying market's price. In other words, delta (Δ) indicates how closely an option will track its underlying market, and how much the option's price will change in relation to the underlying market's price.
For example, a delta (Δ) of 0.75 indicates that an option will track its underlying market at a rate of 75%, so that every one point of price movement in the underlying market would be reflected by 0.75 points of price movement in the option.
Delta (Δ) therefore provides useful information in determing which options contracts should be traded, and how many options contracts should be traded, in order to directly track a specific underlying market.