Greeks in Practice: The 80/20 Guide to Delta, Theta, and Vega

Education only. Options involve risk; not investment advice.

TL;DR

Greeks measure how option prices change with different factors. Focus on the big three: Delta (directional exposure and assignment probability), Theta (time decay), and Vega (IV sensitivity). Gamma and Rho matter less for most strategies. Use delta to size positions, theta to time entries, and vega to gauge IV risk. You don’t need to memorize formulas—just understand the practical impact on your trades.

What Are the Greeks?

Greeks are sensitivity metrics that show how an option’s price changes when variables shift:

Greek	Measures Sensitivity To	Key Use Case
Delta	Stock price movement	Directional exposure, assignment odds
Theta	Time passing	Daily decay (premium erosion)
Vega	Implied volatility (IV)	IV expansion/contraction impact
Gamma	Rate of delta change	Risk of delta swings near expiration
Rho	Interest rates	Minimal impact for most retail traders

For 80% of trades, focus on delta, theta, and vega.

Delta: Direction, Exposure, and Assignment

What Is Delta?

Definition: Change in option price for a $1 move in the stock
Range:
- Calls: 0 to 1.00 (or 0 to 100 in some platforms)
- Puts: 0 to −1.00 (or 0 to −100)
Interpretation:
- 0.30 delta call → option gains ~$0.30 if stock rises $1
- −0.30 delta put → option gains ~$0.30 if stock falls $1

Delta as “Probability”

Delta roughly approximates probability of finishing in-the-money (ITM) at expiration:

30 delta option → ~30% chance of being ITM
50 delta option → ~50% chance (at-the-money, ATM)
80 delta option → ~80% chance (deep ITM)

Why it matters:

Selling a 20-delta put → ~20% risk of assignment (~80% win rate)
Buying a 70-delta call → high chance of being ITM, but expensive

Delta for Position Sizing

Net delta = sum of all deltas in your portfolio.

Long 100 shares = +100 delta (gains $100 per $1 stock move)
Long 1 call (0.50 delta) = +50 delta (acts like 50 shares)
Short 1 put (−0.30 delta) = +30 delta (if you’re short a put, you have bullish exposure)

Example: Wheel strategy

Sell 1 CSP with −0.30 delta → +30 net delta (bullish exposure)
Get assigned → own 100 shares → +100 delta
Sell 1 covered call with 0.30 delta → net delta = +100 − 30 = +70 (still bullish, but capped)

Practical rule:

Target net delta based on directional conviction
Neutral strategy → aim for near-zero delta (e.g., iron condor)
Bullish → positive delta
Bearish → negative delta

Delta Decay Near Expiration

OTM options lose delta as expiration approaches (move toward 0)
ITM options gain delta (move toward 1.00 or −1.00)
Risk: Near-expiration gamma spikes (delta changes rapidly)

Theta: Time Decay (Your Friend or Enemy)

What Is Theta?

Definition: Change in option price per day passing (all else equal)
Typical values:
- ATM option, 30 DTE: theta = −$0.05 to −$0.10/day
- ATM option, 7 DTE: theta = −$0.15 to −$0.30/day
Negative for option buyers, positive for option sellers

How Theta Accelerates

Theta is not linear—it accelerates as expiration nears.

Example: ATM call with 60 days to expiration

DTE	Theta ($/day)	Weekly Decay
60	−$0.03	−$0.21
30	−$0.07	−$0.49
7	−$0.25	−$1.75

Key insight: Most decay happens in the last 30 days (and especially last 7).

Theta for Sellers (Credit Strategies)

Goal: Capture theta decay by selling options
Sweet spot: 30–45 DTE (theta ramps up, but not pin-risk territory)
Avoid: Holding to expiration (theta gain minimal, assignment risk high)

Example: Sell a credit spread 30 days out for $1.00 credit

Weekly theta gain ≈ $0.30
If position moves in your favor or stays flat, close at 50% profit (~15 days, $0.50 gain)

Theta for Buyers (Debit Strategies)

Challenge: You’re fighting theta decay every day
Mitigation:
- Buy with longer DTE (60+ days) to reduce daily decay
- Close positions quickly if thesis plays out (don’t hold to expiration)
- Use spreads to offset some theta (e.g., bull call spread)

Example: Buy a 60-day call for $3.00

Theta = −$0.05/day
If stock moves in your favor fast (within 10 days), sell for profit before theta erodes too much

Weekend and Holiday Theta

Options lose theta over weekends and holidays (even though markets are closed)
Sellers benefit (collect decay), buyers lose value

Vega: Implied Volatility Sensitivity

What Is Vega?

Definition: Change in option price for a 1% change in implied volatility (IV)
Typical values:
- ATM option, 30 DTE: vega = $0.10–$0.20 per 1% IV move
- OTM option: lower vega
- ITM option: lower vega

Key: ATM options have the highest vega.

IV Expansion and Contraction

IV expansion (rising IV):
- Option prices increase (helps buyers, hurts sellers)
- Happens during fear, uncertainty, market drops
IV contraction (IV crush):
- Option prices decrease (helps sellers, hurts buyers)
- Happens post-earnings, after events, calm markets

Vega for Credit Sellers

Risk: Selling options when IV is low → small premiums
Opportunity: Selling options when IV is high → fat premiums, but risk of sharp moves
Best practice: Sell when IV rank/percentile is elevated (> 50th percentile)

Example: Sell a put spread when IV is 60th percentile

Collect $2.00 credit (rich premium)
If IV drops after entry (IV crush), position profits even if stock doesn’t move

Vega for Debit Buyers

Risk: Buying options when IV is high → overpaying
Opportunity: Buying options when IV is low → cheaper entry, benefits from IV expansion
Best practice: Buy when IV rank is low (< 50th percentile)

Example: Buy a call when IV is 20th percentile for $2.00

If IV expands to 50th percentile, option gains value even if stock is flat

IV Rank and Percentile

IV Rank: Current IV relative to its 52-week range (0–100%)
- 0% = lowest IV in past year
- 100% = highest IV in past year
IV Percentile: % of days in past year with lower IV

Rule of thumb:

IV rank > 50 → favor selling (credit strategies)
IV rank < 50 → favor buying (debit strategies)

Gamma: The Greek You Don’t Trade, But Should Respect

What Is Gamma?

Definition: Rate of change of delta per $1 stock move
High gamma → delta changes quickly (near expiration, ATM options)
Low gamma → delta changes slowly (far from expiration, deep OTM/ITM)

Why Gamma Matters

For sellers: High gamma = big delta swings = risk of rapid losses
- Selling options near expiration = dangerous (gamma explosion)
For buyers: High gamma = quick profits if direction is right, but also quick losses if wrong

Example: Sell an ATM put 7 DTE (high gamma)

Delta starts at −0.50
Stock drops $1 → delta swings to −0.70 (now acting like 70 shares short)
Losses accelerate

Mitigation: Close or roll positions before expiration week to avoid gamma risk.

Gamma Scalping (Advanced, Not for Beginners)

Market makers hedge delta by buying/selling stock as gamma changes
Retail traders: just know gamma risk increases near expiration

Rho: The Forgotten Greek

What Is Rho?

Definition: Sensitivity to interest rate changes
Impact: Minimal for retail traders, especially on short-term options (< 90 DTE)

Example: A 30-day option with rho = $0.05

If interest rates rise 1%, option gains $0.05 (negligible)

When it matters: LEAPS (long-term options > 1 year), very deep ITM options.

For 99% of trades: Ignore rho.

Practical Greek Rules by Strategy

Selling Credit Spreads (Bull Put, Bear Call)

Delta: 20–30 delta short leg (70–80% PoP)
Theta: Positive, accelerates last 30 days → target 30–45 DTE
Vega: Negative (short vega) → best in high IV environments
Gamma: Low until near expiration → close before 7 DTE

Example: Vertical spread mechanics align with positive theta, negative vega.

Buying Debit Spreads (Bull Call, Bear Put)

Delta: Long leg 50–70 delta (directional conviction)
Theta: Negative → use longer DTE (45–60 days)
Vega: Positive → enter in low IV environments
Gamma: Moderate → benefits if stock moves quickly

Iron Condors

Delta: Near-zero net delta (20 delta on each short leg)
Theta: Positive (goal = collect decay)
Vega: Negative (short vega on both sides)
Gamma: Low until near expiration → manage early

Goal: Profit from theta while stock stays range-bound. See iron condor guide.

The Wheel (CSP + Covered Calls)

Delta: Positive (bullish tilt)
- CSP: +30 delta
- Covered call: +70 delta (100 shares − 30 delta call)
Theta: Positive (selling premium)
Vega: Negative (short options)
Gamma: Low (selling OTM options)

Goal: Collect theta while maintaining bullish exposure. See wheel strategy guide.

Using Greeks for Entry and Exit

Entry Checklist

Delta: Matches directional bias (or near-zero for neutral)
Theta: Positive if selling (30–45 DTE sweet spot)
Vega: Favorable IV environment (high IV for selling, low IV for buying)
Gamma: Avoid high gamma (stay > 14 DTE if selling)

Exit Signals

Delta shift: Position delta has moved too far from neutral (for condors) or target (for directional)
Theta decay goal hit: Captured 50–75% of max profit (diminishing returns)
Vega spike: IV expansion hurts short positions → consider closing
Gamma risk: Approaching expiration week → close to avoid pin risk

Common Greek Mistakes

Ignoring vega: Selling in low IV environments (tiny credits for full risk)
Buying high theta: Purchasing weekly options with huge daily decay
Chasing delta: Over-leveraging with high-delta options (magnifies losses)
Holding to expiration: Gamma and pin risk explode last few days
Not tracking net delta: Portfolio tilted too far bullish/bearish without realizing
Confusing delta with probability: Delta ≈ probability, but not exact (real probability depends on volatility skew)

Quick Greek Reference Table

Greek	Sellers Want	Buyers Want	Best Time to Trade	Key Risk
Delta	Low delta (OTM)	High delta (ITM/ATM)	Match directional bias	Assignment, rapid losses
Theta	High theta (ATM, near exp)	Low theta (longer DTE)	30–45 DTE (sellers)	Decay works against buyers
Vega	High IV (fat premiums)	Low IV (cheap entry)	Check IV rank/percentile	IV crush (sellers win), IV spike (buyers win)
Gamma	Low gamma (far from exp)	High gamma (near exp, ATM)	Avoid last 7 DTE (sellers)	Delta swings, pin risk

Simple Greek Workflow

Before Entering a Trade

Check IV rank: High (> 50) → favor selling, Low (< 50) → favor buying
Pick delta: Based on strategy and risk tolerance (20–30 delta for credit spreads, 50–70 for debit spreads)
Choose DTE: 30–45 days for sellers (theta sweet spot), 60+ for buyers (reduce theta drag)
Calculate net delta: Ensure portfolio exposure matches outlook

While in the Trade

Monitor delta: If net delta shifts too far, adjust or exit
Track theta decay: Are you capturing expected daily decay? (sellers)
Watch vega: Big IV changes can swamp theta gains/losses
Gamma check: If approaching 7 DTE, consider closing (especially sellers)

At Exit

Profit target hit (50–75% of max profit for sellers)
Stop loss triggered (2× credit or 100% debit)
Greeks turned unfavorable (vega spike, gamma risk, delta breach)

FAQ

Q: Do I need to calculate Greeks manually? A: No. Your broker’s platform shows Greeks for every option. Just learn to interpret them.

Q: Which Greek is most important? A: Delta for direction/exposure, theta for decay, vega for IV risk. All three matter equally.

Q: Can I ignore gamma? A: For most strategies, yes—just close positions before expiration week to avoid gamma risk.

Q: What’s a “good” theta for a credit spread? A: Depends on position size, but aim for $5–$15/day per contract for 30 DTE spreads. Scale by number of contracts.

Q: How do I know if IV is high or low? A: Use IV rank or IV percentile (both available on most platforms). > 50 = elevated, < 50 = subdued.

Q: Should I sell options every day to capture theta? A: No. Overtrading kills returns via commissions and bad fills. Be selective: enter when setup is favorable (IV, technicals, etc.).

Disclaimer: This is education only. Options trading involves significant risk and is not suitable for all investors. Consult a financial advisor before trading.