Greeks

They're the backbone of the formulas for derivatives trades.

Take a look at the Black Scholes formula (the one that prices options, not the padded insets for dark shoes).

If you go to Greece, you have to deal with them. If you join a fraternity or a sorority, you become them. If you want a gyro or study philosophy, you should thank them. And, if you trade in the options market, you have to think about them.

The Greeks. Here, we're going to deal with the options-related versions. (Though, we might grab a gyro and head to a frat party later.)

Options represent a type of derivative contract. They give you the right, but not the obligation, to buy or sell some asset at a set price during a set period of time. So...you might purchase an option to buy 100 shares of APPL stock at $225, with the contract expiring in two months. That would be an option.

The value of an option depends on a lot of factors. The price of the underlying asset mattes.

So, in our example, the price of the option changes as the price of APPL's stock changes. If the price is at $200, an option to buy shares at $225 isn't worth much. It's out-of-the-money.

However, if it's trading at $250, that option is worth significantly more. You could exercise your option, buy shares at $225 and instantly sell them for $250, allowing you to book a profit. The option is in-the-money.

It also matters when the option expires. The closer to expiration the option gets, the more critical the situation. Once the option expires, it's worthless. So if expiration is looming and the stock is close to the line between in-the-money and out-of-the-money, it means more than if expiration is still a couple months away.

The thought process related to option trading also involves what's called "second derivative" measures. These track the rate of change of the other measures. So you have to think about the way the price of APPL affects your option to buy APPL. You also have to think about how that rate of change alters as the underlying asset price moves. Both the amount of change and the rate of change matter.

The Greeks represent the group of all these various measures. They get the name "Greeks" because each consideration is named after a greek letter.

Delta tracks the change in option price as the price of the underlying option changes. Theta clocks the option's time sensitivity. Gamma represents the second-deriviative statistic for delta, measuring the change in delta as the price of the underlying asset changes.

There are other Greeks that get even more esoteric. Vega measures the change of an option's value as it relates to the implied volatility of the underlying asset. Rho has to do with the connection between an option's price and interest rates.

And so on. Zomma, Ultima, Vomma.

It all makes reading Aristotle seem so simplistic.