Alpha measures how the returns of an investment compares against the overall market or a benchmark on a risk-adjusted basis. Higher potential returns are possible through riskier investments, but the goal is to make more money with less risk, finding more Alpha.
Beta helps determine whether the risk is worth the potential return on investment. Higher-beta stocks are riskier, but they typically have the chance for greater returns than lower-beta, lower-risk stocks. Beta only helps define risk since it looks backward and changes over time.
Delta measures the change in an option’s value given a $1 increase in the stock price. If you own a 50 delta call then you will gain $50 for every $1 increase in the stock. The inverse is also true.
Gamma measures the growth rate at which Delta changes when the underlying stock moves $1. As options move in the money, their delta approaches one, and as they move out of the money, their delta approaches zero. Gamma tells traders how quickly the delta is going to change.
Theta indicates how much value will grow over time for option sellers. The growth begins slowly but ramps up as expiration approaches. Theta measures how much an option gains per day. If you sell an option, you have positive theta since time decay helps your position.
Vega measures how much an option will change in value given a 1% change in implied volatility. Options sellers are acquiring negative Vega, meaning they are short volatility and are poised to score if implied volatility falls throughout the trade. Vega tells you how much you will gain or lose when implied volatility changes.
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