Option Greeks

The Greeks are the standard set of sensitivities used to describe how an option's value responds to a change in one of its inputs. Delta is the response to a change in the underlying rate; gamma is the rate at which that response itself changes; vega is the response to a change in implied volatility; theta is the effect of time passing; rho is the response to a change in interest rates. They are named after Greek letters by convention, and vega is not one of them. They are outputs of a pricing model rather than measurements of the market, which is the qualification that matters. Every Greek is computed by holding the other inputs still and asking what a small change does — an assumption that stops describing reality precisely when several inputs move at once, which is when it would be most useful. They remain the language in which option risk is discussed and managed, because they turn a book of different contracts into a small number of comparable exposures. Which model produced them is part of the number, so figures from two systems are not automatically talking about the same thing.