Coffee Break Session:
What Are the Greeks?
Jason Campbell, Strategic Treasurer
Paul Galloway, Strategic Treasurer
Episode Transcription - (Coffee Break Session Series) - Episode 66 - What Are the Greeks?
Jason Campbell 00:03
Welcome to the Treasury Update Podcast, Coffee Break Sessions presented by Strategic Treasurer covering foundational topics and core treasury issues in about the same amount of time it takes you to drink your cup of coffee. I’ll be your host Jason Campbell, business development leader at Strategic Treasurer. So chatting with me today is Paul Galloway, Senior Advisor at Strategic Treasurer. Paul, welcome back.
Paul Galloway 00:24
Thanks, Jason. Glad to be back.
Jason Campbell 00:26
Awesome, as you know, and I think we had a fantastic session last go round talking about the efficient frontier. And I want to continue for with the investing topics. And today, what I’d really like to dive into is this, how we assess risk using the Greeks, investing is one of your hobbies that you have. So let’s talk a little bit more into what exactly are the Greeks?
Paul Galloway 00:48
The Greeks refer to five measures of sensitivity to options prices, so options traders use the Greeks as majors, when they make trades, or trades that they engaged in. So they use them to track how certain metrics are performing. The five Greeks are Delta, Gamma, Rho, Theta, Vega.
Jason Campbell 01:16
When you speak about options into this, can you touch on that a little bit further?
Paul Galloway 01:20
Simply stated with an option is, if you are a buyer of an option, you can buy a put, or a call, which gives you the right to sell something or buy something. It can be for a stated term, and agreed upon price. It’s all tied to the performance of the underlying security, which a person can be long on, meaning they own it, or short on, meaning they don’t own it, but they’re willing to purchase it, or sell it in the future.
Jason Campbell 01:58
So and then when we think about these measurements, you know, what do what do each of these measurements mean, as we talked about the variables.
Paul Galloway 02:05
Delta is the most relevant measure for options traders. And what that does is it reflects the sensitivity of an options price to the change in price of the underlying asset or security. As you can imagine, sensitivity to price changes is going to be super important to options traders, as are always trying to figure out whether the trade is in the money or out of the money, which we’ll talk about later in this podcast. Gamma is the next one I want to talk about. And so gamma reflects how Delta changes with changes in price of the underlying asset. This measure can be positive or negative. And it’s just a reflection of what’s going on with Delta. The next one is row row reflects the sensitivity of an options price to change in interest rates. Now, in the essence of stocks, this is not something that’s particularly interesting or impactful to options trades, involving underlying securities that are stock based, traditionally, interest rates have low impact on options prices. Theta reflects the concept that if the price of the underlying asset, and the options, pricing model factors all remain constant, the price of the options still change over time. This is referred to as time decay. The last one is Vega. Vega reflects the sensitivity of the options price to the volatility or risk of the price of the underlying asset or security. This is an important major in the sense that a sudden, large move in the standard deviation, a measure of volatility can have a significant impact in options price. Vega is largest for options near the money. And we’ll approach zero for options that are deep in the money or deep out of the money.
Jason Campbell 04:19
So that’s a lot of different variables to kind of consider when you’re looking at risk itself as a whole. And I can see why they call it the Greeks. You know, there’s a lot of thinking that you got to put into it to determine what’s kind of the best way to kind of look at that that risk. So when we think about the Greeks here, which do you find most interesting and why?
Paul Galloway 04:40
I think Vega is probably the most interesting one in the sense that it’s tied to volatility, standard deviation or risk. It’s one of the two that options traders are going to look at most often. They’re going to look at Delta Delta super Orton. Vega is also super important. The other three are good variables for them to track. Those two are the ones that they’re going to have their eyes on most often.
Jason Campbell 05:13
It’s an interesting topic and I’m looking forward to in our next episode exploring it just a little bit further. Thank you for joining me today, Paul. I really appreciate it. For our listeners, please be sure to tune in every first and third Thursday of the month for a new episode of the Coffee Break Sessions. As usual, if you have any questions, comments, or any suggested topics you would like to hear, please send us a note at firstname.lastname@example.org. Until next time, take care.
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Coffee Break Sessions – A Treasury Update Podcast Series
A part of the Treasury Update Podcast, Coffee Break Sessions are 6-12 minute bite-size episodes covering foundational topics and core treasury issues in about the same amount of time it takes you to drink your coffee. The show episodes are released every first and third Thursday of the month with Host Jason Campbell of Strategic Treasurer.