# Defintions

# Options Greeks Cheat Sheet

*All examples below use BHP: current price $83.33, put strike $80, option price $1.15, 15 days to expiry.*

## Implied Volatility (IV)
**What it is:** The market's expectation of how much the stock price will move over the next year, expressed as a percentage.

| Value | What it means |
|-------|--------------|
| 0–20% | Low volatility — stock expected to be calm |
| 20–50% | Normal range for most stocks |
| 50–80% | High volatility — big moves expected |
| 80%+ | Extreme volatility — options are expensive |

> **Your BHP put:** IV ≈ 24% → Fairly normal volatility for a large ASX stock like BHP.

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## Delta (Δ)
**What it is:** How much the option's price moves when the stock moves **$1**.

| Value | What it means |
|-------|--------------|
| 0.00 to +1.00 | Calls — rises when stock rises |
| 0.00 to −1.00 | Puts — falls when stock rises |
| ±0.50 | Roughly 50/50 chance of expiring in the money |
| ±0.80–1.00 | Deep in the money — moves almost like the stock |
| ±0.01–0.10 | Far out of the money — very unlikely to profit |

> **Your BHP put:** Delta ≈ −0.20 → For every $1 BHP rises, this put loses ~$0.20. For every $1 BHP falls, it gains ~$0.20. Also read as roughly a 20% chance of expiring in the money.

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## Gamma (Γ)
**What it is:** How much **delta itself changes** when the stock moves $1. Think of it as delta's sensitivity.

| Value | What it means |
|-------|--------------|
| High (0.05+) | Delta changes rapidly — option is very sensitive to price moves |
| Low (0.001–0.005) | Delta barely changes with price moves |
| Near expiration | Gamma spikes dramatically |

> **Your BHP put:** Gamma ≈ 0.07 → If BHP drops $1, delta moves from about −0.20 to roughly −0.27. Meaningful, because this put is only 15 days out and close to the strike.

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## Theta (Θ)
**What it is:** How much value the option **loses each day** just from time passing, assuming the stock price stays flat. Always negative for buyers.

| Value | What it means |
|-------|--------------|
| −0.01 to −0.05 | Slow decay — often far from expiration |
| −0.05 to −0.20 | Moderate decay |
| −0.20+ | Fast decay — usually near expiration or high IV |

> **Your BHP put:** Theta ≈ −0.04 → Loses about four cents per day (×100 shares per contract) just from time passing. As a seller, this works *for* you — every day BHP stays above $80, the option you sold decays toward zero.

---

## Vega (ν)
**What it is:** How much the option's price changes when **IV moves 1%**.

| Value | What it means |
|-------|--------------|
| High (0.50+) | Very sensitive to volatility changes |
| Low (0.01–0.10) | Less affected by volatility shifts |
| Long options | You benefit when IV rises |
| Short options | You benefit when IV falls |

> **Example:** If your BHP put has a Vega of 0.05 and IV jumps from 24% to 28%, the option gains roughly $0.20 in value (×100 = $20 per contract) — bad news if you're short the put.

---

## Rho (ρ)
**What it is:** How much the option's price changes when **interest rates move 1%**. Usually the least important Greek for short-term traders.

| Value | What it means |
|-------|--------------|
| Positive (calls) | Rising rates slightly increase call value |
| Negative (puts) | Rising rates slightly decrease put value |
| Near zero | Short-dated options barely affected |

> With only 15 days to expiry, Rho has almost no practical effect on your BHP put.

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## Delta as a Probability Estimate

Delta is commonly used as a rough estimate of the **probability an option expires in the money**. It's not mathematically exact (the true theoretical probability is a related figure called N(d2)), but it's close enough that most traders use it this way in practice.

| Delta | Rough probability of expiring ITM |
|-------|-----------------------------------|
| ±0.10 | ~10% chance |
| ±0.25 | ~25% chance |
| ±0.50 | ~50% chance (coin flip) |
| ±0.80 | ~80% chance |

> Traders often pick strikes by targeting a delta — e.g. selling puts around 0.20–0.30 delta (like your BHP $80 put) to aim for roughly a 70–80% chance of keeping the full premium.

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## Buying vs. Selling Options — Risk Profile

| | Buying (long) | Selling (short/writing) |
|---|---|---|
| Max loss | Limited to premium paid | Can be very large (naked calls: unlimited; naked/cash-secured puts: strike price × 100) |
| Max gain | Can be large/unlimited (calls) | Limited to premium collected |
| Time decay (theta) | Works against you | Works for you |
| Why WSB accounts blow up | Rarely from buying alone | Usually from selling naked options with leverage, then getting caught by a big move |

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## Income Strategies

**Cash secured put:** Sell a put and set aside cash equal to strike × 100. Keep the premium regardless. If assigned, you buy 100 shares at the strike price — often used on stocks you're happy to own anyway, effectively lowering your cost basis by the premium received.

**Covered call (stock secured call):** Own 100 shares, sell a call against them. Keep the premium regardless. If assigned, you sell your shares at the strike — a way to generate income from stock you already hold.

**The wheel strategy:** Sell cash secured puts to acquire shares you want; once assigned, sell covered calls against those shares to generate ongoing income; if called away, go back to selling puts. A cyclical income strategy combining both.

> **Important nuance:** If you get assigned on a cash secured put and plan to hold long-term, this isn't a realized loss — you've simply bought shares at (strike − premium), even if the market price is temporarily lower. It only becomes a real cash loss if you close the *option* itself at a worse price than you sold it for (e.g. via a stop loss).

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## Stop Loss & Take Profit on Options

These trigger a **buy-back** (if you're short) or a **sell** (if you're long) at a set option price, not the stock price.

**If you sold (short) an option:**
- Option price **rising** = bad for you (stock moving against your position)
- Set **stop loss above** your entry price (e.g. sold at $1.15 → stop loss at $2.15) to cap losses
- Set **take profit below** your entry price (e.g. take profit at $0.50) to lock in gains
- P&L formula: **(entry price − exit price) × 100 per contract**

**If you bought (long) an option:**
- Option price **falling** = bad for you
- Set **stop loss below** entry price
- Set **take profit above** entry price

> **Example:** Sell BHP put at $1.15, stop loss at $2.15. If triggered, you buy back at $2.15 having only received $1.15 — that's a **real cash loss of $100 per contract**, not a discount. This is different from being assigned shares at expiration, which is a stock purchase, not a cash loss (assuming you're happy to hold the shares).

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## Open Interest

The total number of contracts of a specific strike/expiry currently open (not yet closed, exercised, or expired) — different from **volume**, which is how many traded *today*.

- New contract created (both sides opening) → open interest **+1**
- Existing position closed (either side) → open interest **−1**
- One trader takes over another's existing position → open interest **unchanged**, volume still rises

**Why it matters:** Higher open interest generally means tighter spreads and easier entry/exit. Low open interest — common on many ASX options strikes, especially further OTM ones — often means wide spreads and harder fills. It's also watched as a sentiment/positioning indicator, especially around major expiries.

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## Trading Options on the ASX

- ASX-listed options trade through **ASX Trade**, cleared via **ASX Clear** — you never deal directly with your counterparty
- Requires a broker and a signed Client Agreement before trading options
- ASX options generally have **much lower liquidity** than US options — wider spreads, fewer strikes/expiries available
- Common brokers: **Interactive Brokers** (lowest fees, broadest access to both ASX and international options), **CMC Markets**, **IG Australia**

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## Quick Reference: Your BHP Put ($80 Strike, 15 Days to Expiry)

| Greek | Approx. Value | Plain English |
|-------|-----------|---------------|
| IV | ~24% | Normal volatility for BHP |
| Delta | ~−0.20 | Gains ~$20 per contract for every $1 BHP falls; roughly 20% chance of finishing ITM |
| Gamma | ~0.07 | Delta shifts noticeably as BHP moves — this put is close to the strike |
| Theta | ~−0.04 | Loses ~$4/day per contract from time alone (works in your favour as the seller) |
| Contract credit | $115 | $1.15 quote × 100 shares |

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## Key Concepts to Remember

- **One contract = 100 shares.** Always multiply the quoted price by 100 to get your actual cost (or credit received).
- **Out of the money (OTM):** The stock price hasn't reached your strike yet. For puts, this means the stock is *above* your strike price.
- **In the money (ITM):** Your option has intrinsic value. For puts, this means the stock is *below* your strike.
- **Time decay accelerates** as expiration approaches — the last 30 days are the fastest decay period.
- **IV crush:** After major news events (earnings, etc.), IV often drops sharply, taking option prices with it even if the stock moves in your favour.
- **Assignment ≠ automatic loss.** Being assigned shares on a cash secured put just means buying stock at (strike − premium). It's only a realized cash loss if you close the option position itself at a worse price than you opened it.

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## Worked Example: BHP Cash Secured Put

Stock price: $83.33 | Strike: $80 | Expiry: 15 days | Option price: $1.15 (sell to open)

| Scenario | What happens |
|----------|--------------|
| Option price **decreases** | Good for you — stock staying above $80, option losing value toward zero |
| Option price **increases** | Bad for you — stock falling toward/below $80, higher chance of assignment |
| Stop loss at $2.15 hit | You buy back at $2.15 vs. sold at $1.15 → **real loss of $100/contract** |
| Held to expiry, assigned at $80 | You buy 100 shares at $80, keep the $1.15 premium → effective cost basis ≈ **$78.85/share** |
| Assigned but happy to hold long-term | Not a realized loss — you own shares you wanted, at a discount from the premium |