There has been a significant increase in the number of traders in the Indian stock markets. This includes the options traders which focuses on derivative markets. This requires The novice traders to have a deep understanding of such trading and its related concepts. One of the key concepts of options trading is understanding options greeks. Given here is the meaning of this concept and related details of the same.
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Delta measures the sensitivity of an option's price to changes in the underlying asset price. Delta ranges from 0 to 1 for a call option and from -1 to 0 for a put option. The Delta of an option can be calculated using the following formula:
Delta = (? Options Price / ? Underlying Asset Price)
For example, if a call option has a Delta of 0.5, it means that for every Rs.1 increase in the underlying asset price, the option's price will increase by Rs.0.50. If a put option has a Delta of -0.5, it means that for every Rs.1 increase in the underlying asset price, the option's price will decrease by Rs.0.50.
Gamma measures how much an option's Delta will change for every Rs.1 move in the underlying asset price. Gamma ranges from 0 to infinity for both calls and put options. The Gamma of an option can be calculated using the following formula:
Gamma = (?² Option Price / ? Underlying Asset Price²)
For example, if an option has a Gamma of 0.5, it means that if the underlying asset price moves by Rs.1, the Delta of the option will increase by 0.5.
Theta measures the sensitivity of an option's price to the passage of time. Theta is always negative for both call and put options, indicating that the option's value decreases as time passes. The Theta of an option can be calculated using the following formula:
Theta = (? Option Price / ? Time)
For example, if an option has a Theta of -0.05, it means that for every day that passes, the option's price will decrease by Rs.0.05, all else being equal.
Vega measures the sensitivity of an option's price to changes in implied volatility. Vega is always positive for both call and put options, indicating that the option's value increases as implied volatility increases. The Vega of an option can be calculated using the following formula:
Vega = (? Option Price / ? Implied Volatility)
For example, if an option has a Vega of 0.1, it means that if the implied volatility of the option increases by 1%, the option's price will increase by Rs.0.10.
Rho measures the sensitivity of an option's price to changes in interest rates. Rho is always positive for call options and negative for put options. The Rho of an option can be calculated using the following formula:
Rho = (? Option Price / ? Interest Rate)
For example, if an option has a Rho of 0.05, it means that if interest rates increase by 1%, the option's price will increase by Rs.0.05 for a call option and decrease by Rs.0.05 for a put option.
The various ways in which traders can use options greeks for trading and portfolio analysis are highlighted below.
Marisha Bhatt is a financial content writer @TrueData.
She writes with the sole aim of simplifying complex financial concepts and jargon while attempting to clarify technical and fundamental analysis concepts of the stock markets. The ultimate goal is to spread vital knowledge and benefit the maximum audience. Her Chartered Accountant background acts as the knowledge base to help clarify crucial concepts and create a sound investment portfolio.
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