The Five Most Important Questions an Option Trader Better Know.


Trading options without an understanding of how the Greeks function to create option pricing is a dangerous game. An option trader must understand many things.

How much will my option go up in relation to the underlying stock’s price movement?

How much will my option price decay each day as expiration approaches?

At what velocity will my option increase and decrease in relation to its movement closer and farther from its at the money strike price?

How will an option price increase and decrease as volatility changes?

How does interest rates effect the option pricing model?

 If you are an option buyer, then risk resides in a wrong-way price move, a fall in implied volatility (IV) and decline in value on the option due to the passage of time. A seller of that option, on the other hand, faces risk with a wrong-way price move in the opposite direction or a rise in IV, but not from time value decay.

Here are five quick Greek option lessons: