The Greeks

Business Basics
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Automatic TRANSCRIPT

Hello there and welcome to project business basics designed to give you the tools to make smarter financial decisions whether we will to learn something brand new or just wanna refresher on some basic. There is a place for everyone on our show. I'm jennifer and i'm your voice Today were win. Be talking about a concept that we've briefly mentioned before and that concept consists of what are known as the greeks to the greeks before but today we'll go a little bit more into detail about some of them. So first of all even are the greeks so the greeks are related to options and what most of them will tell. You is the rate of change of an options price. If you'll recall with an option we had a stock expiry date a strike price and whether the option was the call or and then the price that the option was trading at and a lot of people who trade or by sell options to then the price that the option can be bought or sold. That is very important. So these greeks than our would tell you as the trader or the person involved in the transaction. How much option price is going to move. So let's get started. So there are five different. Greeks were willing to talk about in. They're all called greeks because of their names the first one we're going to discuss his delta. In the greek language delta is symbolized by trying with delta delta tells you that for every one dollar increase in a stock's price the delta value. Then we'll tell you how much the price of an option will change. So let's say for example that we had a delta of fifty cents and we were using the stock t mobile as an example so right now t mobile stock is about one hundred twenty three dollars. And let's just say that a call option with a strike price of one hundred and thirty is currently priced at seventy six cents per contract. So we're told them that. Delta is fifty cents so then let's say that t mobile stock price sometime in the future and keeping all other factors constant so cetera paribas that sometime in the future t. Mobile stock price is one hundred and twenty four dollars so it moved up by exactly one dollar so that means that the one hundred and thirty strike price call option is now worth fifty cents more and we know that because of the delta value so seventy six cents plus fifty cents means that the one hundred and thirty strike price call option is now worth one dollar and twenty six cents so delta then tells us how in options price moves based on changes in the stock price. Now let's look at data so few remember with options options also have a time to kane them that the closer you get to expiry the either more or less valuable the option becomes depending on where the stock price is relative to the strike price of the option. So theta is symbolized with an or a circle with a horizontal line running right through the middle. So let's say that t mobile stock price is one hundred and twenty three dollars and the same situation. The one hundred and thirty strike price call. Option is currently worth seventy six cents for example sake. Let's say data is negative. Twenty five cents. So what does that mean will remember right now. T mobile stock price is one hundred and twenty three dollars so one day waiter exactly one day later will keep all other factors constant so t mobile stock price is still one hundred and twenty three dollars. The stock price didn't change so delta isn't involved so the only factor that has changed here is time the time to expiry and because we're now one day farther into the future data tells us that the price of the one hundred and thirty call option is going to go down by twenty five cents so seventy six cents minus twenty five cents means that the one hundred and thirty strike price call option. One day later is now worth fifty one cents. Okay now. let's look at wrote so rowe explained to us the relationship between interest rates and then the price of the option. So let's say right now. The current national interest rate set by the federal reserve is right around five percent in right now in reality. It's nowhere close to that but just for examples purpose will save for that right now. The interest rates are five percent and ruined. Use the same situation with t. mobile's one hundred and thirty strike. Price call option. That's worth right now. Seventy six cents then tells us that for every one percent increase in interest rates than. That's how much the option's value increases so for example row is twenty cents so interest rates go from five percent to five point. Oh five percent which is a one percent increase in. This is sometime in the future. Then row means that the one hundred and thirty strike price call option is going to be worth twenty cents. More so seventy six cents. Plus twenty cents means that the call option is now worth ninety six cents and that of course assumes that all other factors so time decay and then delta so that's the stock price that we talked about earlier stay constant or balanced out by each other.

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