More Greeks

Republicans play financial Russian Roulette over a possible default and the market pukes. Republicans start to act like responsible politicians and the market soars. Pretty obvious connection, wouldn't you say?

And, enough of that on this Friday morning. Today I'll finish with the last of the standard measures of option risk, commonly known as the Greeks.

Theta: Theta is the option's sensitivity to time. It is a direct measure of time decay, giving us the dollar decay per day. This amount increases rapidly, at least in terms of a percentage of the value of the option, as the option approaches expiration. The greatest loss to time decay is in the last month of the options life. Having a total positive Theta means time decay works in your favor while a negative Theta means the clock is working against you. The total Theta of your position theoretically indicates the amount of money you make or lose in time decay per day.

Vega:  Vega is the option's sensitivity to changes in implied volatility. A rise in implied volatility is a rise in option premiums, and so will increase the value of long calls and long puts. Vega increases with each expiration further out in time.
 

Rho:  Rho is the option's sensitivity to changes in interest rates. The total Rho in your position indicates your total interest rate exposure. This was a much more important indicator back in the days of double digit interest rates.

As a market-maker I always tried to have a near neutral Delta, kept my Gamma small and wanted a positive Theta so time was on my side. I spread my Vega by being short the near term options and long the farther out. Rho only mattered i