What are the option Greeks and why does FRM emphasize each one?

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AcadiFi · Accepted Answer

Greeks quantify how an option's value moves when a single input shifts, holding others constant. Think of them as partial derivatives of the Black-Scholes-Merton price with respect to market factors. Delta (Δ) measures sensitivity to the underlying price — first-order and used for directional hedging. Gamma (Γ) is the second derivative with respect to spot, showing how quickly delta itself changes, which matters for rebalancing frequency. Theta (Θ) captures time decay per day and funds option buyers' insurance cost. Vega (ν) tracks sensitivity to implied volatility and dominates long-dated options. Rho (ρ) reflects interest-rate sensitivity, significant for long-tenor instruments. Psi is sometimes used for dividend-yield sensitivity in equity options.

At AlderCrest Capital, a derivatives desk running 4,200 S&P contracts would compute aggregate Greeks nightly: a net delta of +185 means the book behaves like long 185 futures-equivalent units. Gamma of +3.2 per point warns of convexity — a 10-point move adds roughly 32 delta. Vega of -$45,000 per vol point signals the desk profits if IV contracts. Risk managers set Greek limits per trader to prevent concentration, and stress P&L by shocking each Greek independently. For the FRM exam, memorize the signs: long calls have +delta, +gamma, -theta, +vega; long puts have -delta, +gamma, -theta, +vega. Understanding these interactions is foundational before moving to exotic Greeks.

What are the option Greeks and why does FRM emphasize each one?

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