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FSD6

Option Greeks describe an option's sensitivity to various risk parameters like volatility and the price of the underlying asset. The Greeks - delta, gamma, vega, rho, and theta - measure how an option's price changes with small movements in these parameters. Understanding the Greeks allows options traders to make more informed decisions about which options to trade and when. Delta measures the change in an option's price with changes in the underlying price. Gamma measures the rate of change of delta. Vega measures sensitivity to volatility. Rho measures sensitivity to interest rates, and theta measures the effect of time decay on an option's price.

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88 views2 pages

FSD6

Option Greeks describe an option's sensitivity to various risk parameters like volatility and the price of the underlying asset. The Greeks - delta, gamma, vega, rho, and theta - measure how an option's price changes with small movements in these parameters. Understanding the Greeks allows options traders to make more informed decisions about which options to trade and when. Delta measures the change in an option's price with changes in the underlying price. Gamma measures the rate of change of delta. Vega measures sensitivity to volatility. Rho measures sensitivity to interest rates, and theta measures the effect of time decay on an option's price.

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Leo the Bulldog
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​Option Greeks

● An option's "Greeks" describes its various risk parameters.


● Option Greeks are financial measures of the sensitivity of an option’s price to its
underlying determining parameters, such as volatility or the price of the underlying
asset.
● The Greeks are utilized in the analysis of an options portfolio and in sensitivity analysis
of an option or portfolio of options.
● Armed with Greeks, an options trader can make more informed decisions about which
options to trade, and when to trade them.

DELTA
(hedge ratio)

● Delta is a measure of the sensitivity the calculated option value has to small changes in
the share price.
● The delta of an option tells you by how much the premium of the option would increase
or decrease for a unit change in the price of the underlying.
● This can help the buyer of an option as to which call/put option should be bought.
● Delta is positive for a bullish position (long call and short put) as the value of the position
increases with rise in the price of the underlying.
● Delta is negative for a bearish position (short call and long put) as the value of the
position decreases with rise in the price of the underlying
● Delta varies from 0 to 1 for call options and from –1 to 0 for put options.
● Example​: An option with delta of 0.4, the premium of the option would change by 40
paise for a Re 1 change in the price of the underlying

GAMMA
● Gamma is a measure of the calculated delta's sensitivity to small changes in share price.
● The gamma of an option tells you how much the delta of an option would increase or
decrease for a unit change in the price of the underlying.
● (If we were to explain in very simple terms: if delta is velocity, then gamma is
acceleration.)
● Delta tells you how much the premium would change; gamma changes delta and tells you
how much the next premium change would be for a unit price change in the price of the
underlying. Gamma is positive for long positions (long call and long put) and negative
for short positions (short call and short put).
● Example​:Assume the gamma of an option is 0.03 and its delta is 0.4. For a unit change in
the price of the underlying, the delta of the option would change to 0.4 + 0.03 = 0.43. The
new delta of the option at changed underlying price is 0.43; so the rate of change in the
premium has increased.

VEGA
● The Vega is the rate of change in the value of the option with respect to the volatility of
the underlying asset.
● In other words, option Vega indicates how much the option premium would change for a
unit change in annual volatility of the underlying.
● Vega is positive for a long position (long call and long put) and negative for a short
position (short call and short put). Simply put, for the buyer it is advantageous if the
volatility increases after he has bought the option. On the other hand, for the seller any
increase in volatility is dangerous as the probability of his option getting in the money
increases with any rise in volatility.
● Example​: Suppose the vega of an option is 0.6 and its premium is 15, when volatility of
the underlying is 35%. As the volatility increases to 36%, the premium of the option
would change upward to 15.6

RHO
● Rho is the rate of change of the value of a derivative with respect to the interest rate.
● It measures the expected change in an option’s price per one percentage point change in
interest rates.
● Example​If a benchmark interest rate increases by 1%, the option price will change by the
rho amount
● As interest rates increase, the value of call options will generally increase.
As interest rates increase, the value of put options will usually decrease.
For these reasons, call options have positive Rho and put options have negative Rho.

THETA
● Theta is the rate of change of the value of the option with respect to the passage of time.
It is also referred to as the time decay of the portfolio.
● Simply put, Theta tells you how much the price of an option should decrease as the
option nears expiration.
● The theta of holding long position of a call or a put option is usually negative.
● An option that loses 0.1% per day is said to have a Theta of −0.1%. .

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