What are the option greeks and can they be applied to commodity options?

Collectively, the option greeks are a group of equations used to measure and identify the sensitivity of an option price to outside forces such as price changes in the underlying asset, the passage of time, or changes in market volatility. The greeks can be useful to option traders in many ways, but are most often used as a proxy for trade probability.

The greeks are similar to other market tools in that they tell traders what has already happened, not what will happen in the future. This is the case despite some option probability software that attempts to project trade probabilities. For instance, the greek calculations take into account today’s market environment but could adjust dramatically if volatility or market sentiment changes significantly tomorrow. In other words, the greeks and any resulting probability calculations are dynamic, not static. Accordingly, traders should refrain from allowing favorable greeks to lure them into complacency.

In the case of commodity options, I argue that the greeks might be less reliable than is the case for options on stocks. This is partly due to generally less liquid market conditions (although many commodity markets are highly liquid) and leveraged underlying assets.

Continue reading about the Greeks and commodity options...

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