By Mike Parnos, Online Trading Academy’s Options Therapist*

Let the beat, and your education, go on. In this article, I’m going to talk about the Greeks. First, there was Zorba. Then, there were Aristotle and Sophocles. Okay, maybe Aristotle and Sophocles came first. What's a few thousand years one way or the other?

No. Seriously now. Delta is an interesting concept and an important one. It's actually a measurement. It measures how much the value of a call option increases when the underlying asset goes up $1.00.

Let's say a stock is trading at $35, and you buy a $35 call for $2.00. If the stock goes up $1, the $35 call option will increase, but it isn't going to go up penny for penny. Remember: When you buy a call option, part of what you are paying for is time -- time for the stock to (we hope) increase in value. Delta measures how much the option goes up.

In the previous example, a $35 call on a stock trading at $35 would be considered at-the-money (ATM). A rule of thumb is that, when a call is ATM, it has an approximate delta of .50. On the other hand, the $35 ATM puts would have a delta of approximately -.50.

Don't worry about the positive and negative stuff right now. Just think about these values as percentages. The total value of the deltas for the $35 puts and $35 calls will add up to approximately 100%. Later on, we can get into positive and negative deltas if the subject of "delta neutral" option strategies comes up.

So, back to our example. When the stock increases from $35 to $36, the value of the $35 call would increase approximately 50 cents. The $2.00 value would increase to $2.50 ($2.00 plus the $.50).

When we originally paid the $2.00 for this $35 call option, all we bought was time value. There was no intrinsic value. The $35 call was at-the-money. However, now that the stock has moved from $35 to $36, the value of the $35 call has increased to $2.50. The $35 call is no longer ATM but now has $1.00 of intrinsic value. It is now in-the-money (ITM).

Why is this important? Well, the importance of this example is to show you that, the further the option moves ITM, the less time value there is in the option. This concept applies to most option strategies. Notice that, with the $35 call option now valued at $2.50, $1 is intrinsic, and the remaining $1.50 of the option price is now time value -- less than the original $2.00 of time value.

As the stock continues to increase in value, the delta goes higher as well. When the stock was ATM, the delta was approximately .50. After the stock went up $1, the delta also increased. The amount of the increase will vary from stock to stock, but, for the sake of our example, let's say the new delta of the $35 call is now $.55 (an increase of a nickel).

The new delta is now .55. So, as the stock moves up a second dollar, from $36 to $37, the value of the $35 call moves up another $.55 to $3.05 ($2.50 plus $.55).

The Greek letter that measures the rate that the delta changes is called "gamma." When you look at the option chain that shows you the value of the delta, you will likely be able to look one column to the right for the gamma value. This measure, gamma, will also vary from stock to stock.

So, here’s a little quiz for you:

a) Based on the figures in the previous table, the value of the $35 call option when the stock moves from $37 to $38 dollars would be: _____________.

b) Based on the figures in the previous table, when the stock is at $38, the $35 call will have ___________ of intrinsic value and _____________ of time value.

Hey, this is good stuff, especially if you're serious about learning options. The Pulitzer people won't likely be knocking at my door soon, but I've taught a lot of people how to conservatively and consistently make money, and they're still making money to this day. I hope you'll become one of them.

Remember: Trading is as much psychology as it is skill. Keep an open mind. You never know what might find its way in there.

* Reprinted (and modified) with permission from Online Trading Academy www.onlinetradingacademy.com