Options Greeks Explained: Why You Lose Money — Full Breakdown & Transcript

[00:01] options trade and still lose money. Think about that for a second. Most traders hear that and immediately think that doesn't make any sense. If I buy something and it goes up, I should make money.

[00:14] And if I buy something and it goes down, I should lose money. It's pretty simple. That's how stocks work, but options don't work that way. And that's exactly video. By the end of this video, you're going

[00:27] to understand why option prices move the way they do, why your P&L sometimes doesn't react the way you expect, and how the Greeks are really the forces driving everything behind the scenes. And we're going to keep this simple.

[00:41] We're going to use one stock, one option, one trade the entire video. Instead of buying stock, we're going to buy a call option. And we're going to use the same Apple call throughout the entire lesson. Because once you

[00:55] one trade, you'll understand the foundation behind every option strategy Let's start with a simple question. Why do people buy options in the first Most people buy options because they want exposure to a move in a stock

[01:12] itself. They have a directional opinion. They think the stock is going to go higher. And that's where the first Greek comes into play, Delta. Delta is your directional exposure. If

[01:26] sentence, I would say Delta tells you how much exposure you have to the movement of a stock. That's it. It's the directional exposure. Now, let's jump into OptionNet Explorer and look at our Apple call. If you're looking at the

[01:41] screen, you can see that we bought this call and we went 30 days out and our call and we went 30 days out and our Delta is around 35. What this is telling us is that we have directional exposure to Apple. We don't own the stock. If we

[01:55] 100 shares of stock, we would roughly buy or we would exactly buy 100 deltas. So right now we're participating in the move, but we're not participating it like a stock owner.

[02:09] Now let's go a few days forward and see what happens. As you can see, our deltas have moved from 34 to 31.

[02:30] from 31 to 46. So when you're right, your exposure increases to the stock and it acts more like the stock itself. If Apple starts moving lower, your delta begins to shrink. As your delta shrinks,

[02:45] your option reacts less and less like the movement of the stock. This is don't own the stock, you own the exposure to the stock and that exposure This is why traders who are delta neutral

[02:59] try to keep their deltas very low in the position. They don't want the directional exposure. They're trying to remove it. But when we're buying a call option, we absolutely want that directional

[03:11] exposure and that's what we're getting here. We're bullish. We want Apple to move higher and ideally we want our deltas to increase with it. Watch what happens as we keep going higher and higher.

[03:23] Our deltas increase with it. We're going to start acting more and more like the stock when that happens. Now let's talk about theta. Theta is probably the Greek that frustrates traders more than any other one. Theta

[03:36] is the rent you pay every single day for owning the option. There's no free lunch in trading and there's definitely no free lunch in options. for time. Every day that passes, some of that time

[03:51] value disappears. That's theta. And that is where options become very different from stock. If you buy a stock and the stock sits still, not much changes. If you buy an option and the stock sits still, you're

[04:05] still losing something, time. Let's jump back into our Apple call. Now, if Apple just sits still for 1 day, when we're entering, again, we're 30 days to expiration, we lose $14.47

[04:19] per day. We're negative theta in this trade. And as we move forward, time value is going to time value is going to increase as we get closer to expiration.

[04:36] passing. And if we look down at theta, theta's value of that value is coming out of the option each day. option each day. This is the cost of owning the option.

[04:50] It's the rent we pay for having the opportunity to be part of the move. Now, here's the part that traders do not realize. Theta is not linear. As you get closer to expiration, theta

[05:04] As you get closer to expiration, theta increases. really starts to kick in as we get closer to expiration.

[05:16] That's why traders often feel like options decay faster near expiration. It's because they do. Now, if we flip this trade around and became an option seller instead of an option buyer, we'd be collecting that

[05:28] rent every day instead of paying for it. But, for this example, we're focused on the buyer. And as the buyer, our goal is simple. We want Apple to move faster than theta works against us.

[05:45] now. Until we're at about here. But theta is still kicking in every single day. And that's the rent that we're paying each and every day that we're holding that option. Now, let's move on to Vega.

[05:59] This is where many traders have their first real light bulb moment because most people think they're trading price. But when you buy options, you're trading volatility, too. Vega measures how much an option gains or loses value when

[06:13] implied volatility changes. And if you're buying a call option, you're long Vega. That means rising volatility helps you, falling volatility hurts you. Let's take a look at this.

[06:26] As we're looking here at our Apple call, we can see our Vega number down at the we can see our Vega number down at the bottom here. Our last Greek here. 27.72. For every 1% that implied volatility

[06:39] rises in this option, we're going to gain $27.72 on this option. For every point that it decreases, we're going to lose $27.72.

[06:54] This is one of the biggest surprises for new options traders. They buy the call, the stock goes up, they're right, and the option doesn't gain much in value. came out of that option. So, in Option Net here, we have a

[07:07] function here where it says vol adjust. So, let's just see what happens if we So, let's just see what happens if we increase our volatility by three points.

[07:20] value. It went up the amount of the vol of the Vega in the trade for every one point. Now, let's watch our P&L as we decrease the option three points.

[07:38] volatility is a major component of options pricing. When you're trading options, you're trading volatility, too. And once you understand that, your confusing P&L will start to make a lot of sense.

[07:52] Now, let's talk about gamma. Gamma is usually the most misunderstood Greek. And honestly, that's because there are two ways to think about it, and they're both correct. The textbook definition of gamma is the rate of

[08:04] change of delta. But most traders understand gamma much convexity. Convexity is simply how quickly you make money and how quickly you lose money. Now, let's take a quick look.

[08:18] All right, we brought back up our Apple call again. Earlier, we talked about delta. We talked about how delta changes. Gamma is what causes that change. Watch what happens as Apple moves

[08:33] higher. Let's go forward a two days.

[08:48] as we move through the different price levels. delta is changing by that amount of gamma.

[09:00] That's the actual definition of gamma. But let's think about why this matters. As we get closer and closer to expiration, expiration, our gamma is going to increase.

[09:13] expiration feel much more explosive. This is why traders who trade shorter-dated options have much larger swings in their P&L. Gamma's amplifying The easiest way to think about gamma is gamma is your convexity risk. It's how

[09:28] quickly you make in money and how quickly you lose money. Higher gamma means bigger swings. Lower gamma means smaller swings. Neither is right, neither is wrong. They're simply different risk profiles.

[09:44] But it's very important to understand the difference because it dramatically changes how your trade behaves. So if you want a lot of convexity, gamma. If you want lower convexity with

[09:59] your trades not moving as much on P&L, you're going to have lower gamma on your trades. Now let's put this all together. Let's assume our we buy our Apple call. right. Directionally, we got the trade right.

[10:15] Delta is helping us, but theta is still working against us. Vega is either helping us or hurting us, depending on what volatility is doing, and the gamma is changing with our delta as the trade evolves. All four Greeks are working

[10:31] simultaneously, and that's why options can feel confusing at first. But you're never trading just one thing. You're trading multiple forces at the forces and how they interact is the key

[10:43] options. If you understand delta, theta, vega, and gamma, you understand what's driving your P&L. And once you understand what's driving your P&L, options stop feeling random. You stop guessing. You stop wondering

[10:58] you expected, and you start understanding exactly what's happening If you remember nothing else from this video, remember this. Delta is your directional exposure. Theta is the rent you pay for time. Vega

[11:13] is your exposure to volatility, and gamma is the convexity risk and the rate Once you understand those four concepts, you'll understand the foundations behind every option strategy you'll ever trade. And that's exactly what we're going to

[11:26] build on throughout the rest of the series, because before you learn how to trade options, you need to understand how options actually work. >> Now, if you'd like to learn three more options strategies that our pro traders

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