Understanding Option Greeks

In Continuation in Previous Posts

How Option Prices are Determined

How To Calculate An Expected Range For The Market using Options ?

This Options concept are shared by Mr Raja Mohan an Expert Option Trader. I am thankful to Him for sharing his knowledge to all the Readers.

  • Delta:- Change in option price with underlying spot (1st 3 are most imp and last 2 are less imp)
    Theta:- change in option price with time
    Vega:- change in option price IV
  • Gamma:- change in Delta with spot (Double deravative, like accelator for Delta speed) (Have high impact on expiry day)
  • RHO:- change in option price with interest rate (India 10 Y Bold interest rate can be taken for caluculate Interest rate)

Methods to caluculate voltality (Option Greeks)-

Black sholes (Cash as input, Underlying stock/Index Price, European model and Indian options use this method)

Black 76 (Uses Future input)

Binomi Model (Cash as input, Underlying stock/Index Price)


Calls have positive Delta and Put have negative Delta
ITM Options- Delta have value 1
ATM 0.5

ATM Option have always 0.5 (Week/month/year)
Current month OTM options have lower Delta then next month OTM options

Delta Vs Time:-

Delta is the probability of expiry in the money.

ITM Options. if they have higher time to expire. Delta can decrease (Bcoz in a month period. Price may fall/raise)
ATM Options. stays same
OTM Options. Delta can be increased if they have higher time to expiry

Delta Vs IV

Delta is the probability of expiry in the money.

ITM Options Delta can be decreased if the option have high IV and can go to out of the money
ATM options stays same
OTM Options if have higher IV . Delta can increase and expires in in the money.

Practical Application-

If u r betting in one direction. Pickup high Delta option
If u don’t want bet on big. pick up small Delta option

Delta1.. Buy deep ITM call, Sell deep ITM put

2) Theta:-

Time value decay of options
change in option price with passage of one day

Positive- U get time value when u sell options
Negative- U loose time value when u bought options
Theta changes every day Increases usually

Theta Vs Time:-

Options with lot of time left decay slow
Options with very little time left decay fast for near ATM&OTM options

Theta decay (Option value erosion with time):-

If Nifty 11000 Option at 80 and Theta is -10 means. Next day if option closes at same level without any change.. Price will come down -10 and last 2 days of expiry theta decay will be fast.

Theta Vs IV:-

When IV increases, Option price increases
When option price increase, the value it loses each day also increases.

ATM Option have the highest theta
OTM options have low theta
ITM option have low Theta

High Vega options have high theta (ATM)
When IV increases, Theta also increases and IV decreases theta decreases
High Gamma options have high Theta (ATM)

3) Vega:-

Change in Option price with chg in IV
When IV increased option price increases (With hope factor)
Positive when u Buy options (Call, Put)
Negative when sell Options (Profit when IV goes down, loss when IV goes up)

Vega Vs Time:-

If there is more time, voltality can cause big moves, So more time means higher sensitivity to voltality
Long Dated option have high Vega
Short dated options have lower Vega

Vega to measure voltality. Vega measures change in option price with chg in IV. If Vega is high Option price changes a lot. High for Long term and low for short term options.
+Ve vega indicates you gain when volatlity increases
-ve vega indicates you looses when volatlity decreases.
Vega is positive for Buy Options for Call and Put
Vega is negative for Sell Options for Call and Put

4) Gamma:-

Change of Delta with chg of spot

Matter when you

Trades near the expiry
trade near the ATM
trade big quantities

Gamma decreases with increases time to expiry
Bcoz Delta does not not chg much when there is high no of days to go

Gamma Vs IV:-

Gamma decreases with IV
Delta does not chg much when there is higher IV

Time value decay accelarates towards end in ATM Options. 1/2 time value decays in the last 1/4 time left.

If IV (Implied volatality) falls it will efffect vega and it falls

Meta of Options:-

Quick, big move- Buy a short term option
No move or small move- Sell short term option

Sell call if small downmove
Sell Pur if small upmove

Ahead of results/events IV is high. avoid buying options.

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