One of the most successful investment professionals in the world today spoke these wise words: “Some people with high IQs are terrible investors because they’ve got terrible temperaments. That is why we say that having a certain kind of temperament is more important than brains.”

Those are the words of Charlie Munger, Warren Buffet’s most trusted advisor. He believes that how you trade may be more important than how much you know about the markets. It certainly holds true for option trading.

Options are extremely versatile instruments and can be used in many ways. Experienced option traders tend to select and refine a trading style that most effectively fits their temperament.

The most commonly used trading styles are built on something called option Greeks. These are the power tools of the option trading world. They measure the way option prices might move. There are many of these measures, but the three most commonly used ones are Delta, Theta and Gamma. Here is a simple definition for each.

Delta measures how sensitive an option is to its underlying stock. A contract with a high delta score means it will move similarly to the stock. A low delta score means the contract won’t change much without an unusual move in the stock. 

Theta measures the amount of time decay an option will experience. Theta scores are negative numbers and they become more negative for an option as the expiration date approaches. 

Gamma measures the potential for price acceleration of the option. The higher the gamma score, the more the Delta score of an option will change. 

To help new traders get properly introduced to the key aspects of option trading, Options Academy has sorted option trading into three distinct styles. Each style is based on one of these measures.  

It might be useful to know that these measures align well with the three factors discussed in part two of this Beginner’s Guide. Factor number one, Market Action, aligns closely with gamma. 

Factor number two, time decay, aligns with theta. And Factor number three, the underlying stock movement, aligns with delta. Let’s take a closer look at each of these trading styles to understand why they are so important.

Trading Style # 1: Gamma

Gamma measures the potential for option price increases to accelerate. The gamma style of trading seeks to buy options that could become more valuable at increasing rates. Gamma style trading seeks to capture unexpected and significant moves. This works well for those who want to approach the market as option buyers. This trading style can be done in short, intermediate, or even longer trading time frames, but usually works best in short-term or intermediate trading. 

Trading Style # 2: Theta

Theta measures the amount of time decay an option should expect for one day. The rate of decay is not linear. It starts off slowly and accelerates as the expiration date approaches. Theta style trading usually works well for those who want to approach the market as sellers. Since time decay works against the option buyer, but works in favor of the option seller, the strategies that best work with this style typically focus on collecting time value rather than paying it. 

Trading Style # 3: Delta

Delta style trading balances risk and reward to have a better than even chance of winning. This style of trading helps traders seek the most effective ways to leverage stock moves. That’s because Delta measures the sensitivity of an option’s price to movement in the underlying stock. The strategies that work with this trading style effectively trade the swings of stock prices. Traders who specialize in Delta-style option trading may approach the market as either a buyer or a seller. Whichever they choose, they will often rely on shorter timeframes for their intended outcomes. 

Option traders who select one of the three trading styles and study its strategies in depth may find that they can learn about option strategies faster and more effectively. The next part of the Beginner’s Guide will discuss which option strategies are aligned with each of these three option styles.

One of the most successful investment professionals in the world today spoke these wise words: “Some people with high IQs are terrible investors because they’ve got terrible temperaments. That is why we say that having a certain kind of temperament is more important than brains.”

Those are the words of Charlie Munger, Warren Buffet’s most trusted advisor. He believes that how you trade may be more important than how much you know about the markets. It certainly holds true for option trading.

Options are extremely versatile instruments and can be used in many ways. Experienced option traders tend to select and refine a trading style that most effectively fits their temperament.

The most commonly used trading styles are built on something called option Greeks. These are the power tools of the option trading world. They measure the way option prices might move. There are many of these measures, but the three most commonly used ones are Delta, Theta and Gamma. Here is a simple definition for each.

Delta measures how sensitive an option is to its underlying stock. A contract with a high delta score means it will move similarly to the stock. A low delta score means the contract won’t change much without an unusual move in the stock. 

Theta measures the amount of time decay an option will experience. Theta scores are negative numbers and they become more negative for an option as the expiration date approaches. 

Gamma measures the potential for price acceleration of the option. The higher the gamma score, the more the Delta score of an option will change. 

To help new traders get properly introduced to the key aspects of option trading, Options Academy has sorted option trading into three distinct styles. Each style is based on one of these measures.  

It might be useful to know that these measures align well with the three factors discussed in part two of this Beginner’s Guide. Factor number one, Market Action, aligns closely with gamma. 

Factor number two, time decay, aligns with theta. And Factor number three, the underlying stock movement, aligns with delta. Let’s take a closer look at each of these trading styles to understand why they are so important.

Trading Style # 1: Gamma

Gamma measures the potential for option price increases to accelerate. The gamma style of trading seeks to buy options that could become more valuable at increasing rates. Gamma style trading seeks to capture unexpected and significant moves. This works well for those who want to approach the market as option buyers. This trading style can be done in short, intermediate, or even longer trading time frames, but usually works best in short-term or intermediate trading. 

Trading Style # 2: Theta

Theta measures the amount of time decay an option should expect for one day. The rate of decay is not linear. It starts off slowly and accelerates as the expiration date approaches. Theta style trading usually works well for those who want to approach the market as sellers. Since time decay works against the option buyer, but works in favor of the option seller, the strategies that best work with this style typically focus on collecting time value rather than paying it. 

Trading Style # 3: Delta

Delta style trading balances risk and reward to have a better than even chance of winning. This style of trading helps traders seek the most effective ways to leverage stock moves. That’s because Delta measures the sensitivity of an option’s price to movement in the underlying stock. The strategies that work with this trading style effectively trade the swings of stock prices. Traders who specialize in Delta-style option trading may approach the market as either a buyer or a seller. Whichever they choose, they will often rely on shorter timeframes for their intended outcomes. 

Option traders who select one of the three trading styles and study its strategies in depth may find that they can learn about option strategies faster and more effectively. The next part of the Beginner’s Guide will discuss which option strategies are aligned with each of these three option styles.