Why Is It Important To Understand Stock Option Greeks?

We often hear people saying that trading or investing in options is very risky. Yes, it is certainly no mean feat to trade or invest, using options as your investment vehicle. But is it really that risky in the first place? If trading or investing in options is really risky, then why are there so many individual traders or investors who make money from it? The only possible explanation is that those people had spent a lot of time and effort to study, understand and learn all they can about options in addition to the basic technical knowledge of how the market functions. They would have learnt how to increase their probabilities in making a profit and also reduce their risk to the minimum.

So what actually are stock option greeks? Why is it important to understand how they can affect the profitability of your trade or investment? Stock option greeks are actually sensitivities of the stock option to risks characteristics. These risks are actually factors that affects the pricing of the option. By learning how the stock option greeks relate to risk characteristics in addition to other basic technical analysis skills such as identifying the market trend, knowing when to and not to trade or invest according to timing ( Eg. Not to trade during lunch hours ), interpreting technical indicators correctly, have a risk and money management system to assist in making decisions when trading or investing ( This helps to eliminate and not involve your emotions that affect your trading decisions ) ...etc We are able to have certain control over our risk exposures to leverage, time decay, volatility and interest rate risks. Each option risk characteristics, is represented by a greek word and they affect the option pricing differently. It is important to know whether you are purchasing a stock option at a under or over priced value as this can be another factor that will affect profitability of your trade or investment. You do not want to be in a disadvantage position at all times when trading or investing as the majority of the factors are against you and you have absolutely no control over them. ( Eg. Interest rates )

Mastering each risk characteristics will certainly help to reduce risk tremendously when trading or investing in stock options, what's more, there are lots of stock option strategies that can be utilized once you understand the mechanics of the stock option greeks and make them work for your trade or investment.