Good morning, traders…

If you want to drive a car, you have to learn the rules of the road.

If you want to speak French, you have to know your verb conjugations.

If you want to cook a perfect steak, you have to master heat and timing.

And if you want to make successful options trades on Quad Witching Friday…

You have to understand The Greeks.

I’m not talking about Poseidon, Apollo, or Hercules…

I’m talking about Delta, Gamma, Theta, and Vega: the four hidden metrics that control every options trade you make.

The average trader sees these numbers on the options chain and has absolutely no idea what they mean. 

They ignore the Greeks entirely. 

Then Quad Witching hits … tomorrow. 

Stock options, index options, stock futures, and index futures all expire at once.

And traders who don’t understand The Greeks watch their positions get destroyed for reasons they can’t explain … by forces they don’t even know exist.

Don’t be one of those traders…

How The Greeks Can Help You Win

Delta, gamma, theta, and vega are four measurements that show how the price of the underlying stock affects the options contracts you trade.

They’re specifically designed to help you understand the probability of your bets.

Options pricing isn’t linear. Premiums don’t follow the underlying share price exactly.

This volatility gives option contracts their high profit potential. It’s why you can make outsized gains trading options. 

Paradoxically, it’s the same reason you can lose money quickly (if you aren’t disciplined).

In options trading, the probability of an option expiring in the money (ITM) is particularly important. 

If your contracts have a low probability of expiring ITM, they’ll be considerably less expensive than their higher-probability counterparts. 

That said, those contracts will also increase by a greater % if they do reach (or exceed) their strike price. 

That’s why options traders have used the Greeks for years…

Each Greek focuses on a different part of options pricing, providing crucial insight into how your contracts will react in various scenarios. 

The Greeks tell you the probability of an options bet working (or not).

Let’s break them down…

Delta

Delta compares how an options contract moves with the stock price.

It predicts how much the price of a contract will change if the stock price moves by $1.

Delta is shown as a number between -1 and 1. 

A higher delta means the contract follows the stock price more closely.

Some of the weekly OTM contracts I trade have a low, negative delta. 

This is why I’m selective with the options I choose. 

They’re risky, but they can also bring big gains.

Remember: Call options have a positive delta, while put options have a negative delta.

Gamma

Unlike delta, gamma is a % showing how much delta changes with the stock price.

Gamma goes up when a contract is in the middle of an options chain. It goes down for contracts that are deep in or out of the money.

Gamma is linked with implied volatility (IV), as evidenced by “gamma squeezes.”

A gamma squeeze is like a short squeeze on steroids. Traders buy low-delta, short-dated options, which pushes IV and gamma up.

This can dramatically increase the price of certain contracts, as seen in cases like the infamous Gamestop Corp. (NYSE: GME) and AMC Entertainment Holdings Inc. (NYSE: AMC) gamma squeezes of 2021.

In a gamma squeeze, options contracts can increase 1000% or more as options buyers pressure market makers with higher and higher call prices. 

Had you understood gamma in 2021, you might have been able to capitalize on the GME squeeze.

Grasp it now, and you just might catch the next one. 

Theta

Theta (a.k.a. Time decay) shows you exactly how much a contract’s premium will decrease as it nears expiration.

Theta is always negative because options lose value over time.

Generally, sellers want higher theta (more decay), while buyers want lower theta (less decay).

It’s the hidden enemy sabotaging many call buyers’ trades. 

But there’s no one-size-fits-all rule in options trading.

For example, the “weekly” options I trade have high time decay and theta. But that doesn’t make them untradeable. As long as I’m disciplined and keep my stops tight, those trades can be extremely profitable. 

Vega

Vega measures how much a contract’s price is subject to change in response to changes in IV. 

Vega will be high if the underlying share price is close to the option’s strike price. 

But it lessens as the contract moves further in or out of the money. 

Vega also moves lower as the option nears expiration. This is because there’s less intrinsic value in the contract by that point in its life cycle.

The important thing to understand is the effect that vega has:

If vega ramps, every option on the chain will increase in value.

How I Use ‘The Greeks’

Most importantly, I want the delta to give me enough upside, and the theta to not bring ridiculous downside. 

Generally, I’m looking for a 3:1 relationship between delta and theta.

Finding the “Greek rules” that work for you can simplify your process exponentially. 

The Greeks might not be the sexiest part of the market, but they’re necessary, like eating your vegetables or memorizing times tables. 

They provide a framework for evaluating risk and potential reward, helping you make decisions that align with your market outlook and risk tolerance. 

Start watching these values and note how they relate to your trading…

Are you having more success when the Greeks on your contracts are at a certain level? 

Less when they are at others? 

Pay attention.

Whether you’re trading puts or calls, understanding The Greeks is crucial to surviving tomorrow’s Quad Witching (and to long-term success in the options market)…

Happy trading,

Ben Sturgill

*Past performance does not indicate future results