Many seasoned options traders use a number of measurements to estimate how the values of their options contracts may change and these gauges are known, collectively, as the Greeks.
Delta, gamma, theta, and vega are the main ones that traders watch. These Greeks are computed using option pricing models and each help us see how different factors can affect our option prices. Fortunately, we don’t need to do the math ourselves because they are available on many web sites and trading platforms.
Delta is probably the most widely used of the Greeks. It estimates, theoretically, how much the value of an option contract will change for every point change in the price of the underlying stock. For instance, a call option with a delta of .25 is expected to see a 25-cent increase in value for every $1 move higher in shares or a 25-cent decrease for every $1 price drop (or $25 when we factor in the 100 multiplier for single stock options). Calls have deltas ranging between 0 and 1. Puts have negative deltas ranging from 0 to -1.
Deltas are always changing as the stock moves higher and lower. A call with a delta of .25 might see its delta increase to .35 if shares move higher. Always a positive number, gamma can be used to estimate the potential changes in delta for every $1 price move in the price of the underlying. If delta is speed, gamma is the accelerator.
Delta is also used as a thumbnail for whether or not an option will be ITM at the expiration. For instance, a call with a delta of .45 has a 45% probability of expiring ITM and a put with a delta of ‑.55, a 55% probability. It's not perfect, but a useful tool nonetheless.
Theta is important to understand because it measures the impact of time decay on an option. It gives us a sense regarding how much value the contract will lose with each passing day. Therefore, it is always a negative number because time decay is always working against puts and calls.
Vega is not actually a Greek letter, but it is one of the Greeks in the options world. It measures the impact of changes in implied volatility (IV) on the value of an option contract. For instance, an option with a vega of .10 is expected to see a 10-cent increase for every 1-point increase in volatility and a 10-cent decrease for every 1-point decrease in IV.