Options and the Greeks: an introductory map

Prerequisite: Spot, CFDs and futures are different contracts

On a small screen, scroll the figure sideways or open it full size.

Learning objective

Explain delta, gamma, theta and vega as model sensitivities rather than promises.

An option buyer pays a premium for defined rights under its contract; calls and puts differ in direction, and exercise style and settlement vary. An option seller has corresponding obligations. Some uncovered short option positions can have very large or theoretically unlimited losses; do not generalise the buyer’s premium limit to the seller.

Delta estimates local price sensitivity to the underlying; gamma describes how delta changes. Theta estimates sensitivity to time passage, while vega measures sensitivity to implied volatility. Their units and conventions depend on the platform, and their values change as price, time and volatility change.

An option can lose value even when the underlying moves in the expected direction if time decay or volatility changes dominate. Greeks are local model approximations, not exact predictions for large jumps. Check contract multiplier, expiration, liquidity and exercise consequences before evaluating a hypothetical payoff.

Common mistakes

Do not treat delta as a guaranteed probability of profit. Check whether vega refers to one percentage-point volatility change.

Practice

For one hypothetical call, sketch expiry payoff and separately explain what delta, theta and vega would measure before expiry.

Sources & further reading

• CME Group — Option Greeks