Scribd Logo
Upload

Welcome to Scribd!

  • 11 views

    Option Greeks

    Uploaded by

    biswajit1011a
    The document defines and explains the Greeks, which are sensitivities of options to various factors like price movement, time decay, volatility, and interest rates. It describes Delta as the movement of an option position relative to the underlying asset's movement and indicates the probability of the option expiring in the money. Gamma is the rate of change of Delta and shows the odds of a change in the probability of expiring in the money. Theta represents time decay, with long options having negative Theta and short options having positive Theta. Vega is the sensitivity to volatility, with options increasing in value when volatility increases. Rho is the least important Greek, representing sensitivity to interest rates.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Option Greeks

    Uploaded by

    biswajit1011a
    11 views1 page
    The document defines and explains the Greeks, which are sensitivities of options to various factors like price movement, time decay, volatility, and interest rates. It describes Delta as the movement of an option position relative to the underlying asset's movement and indicates the probability of the option expiring in the money. Gamma is the rate of change of Delta and shows the odds of a change in the probability of expiring in the money. Theta represents time decay, with long options having negative Theta and short options having positive Theta. Vega is the sensitivity to volatility, with options increasing in value when volatility increases. Rho is the least important Greek, representing sensitivity to interest rates.

    Original Description:

    Option Greeks

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document defines and explains the Greeks, which are sensitivities of options to various factors like price movement, time decay, volatility, and interest rates. It describes Delta as the movement of an option position relative to the underlying asset's movement and indicates the probability of the option expiring in the money. Gamma is the rate of change of Delta and shows the odds of a change in the probability of expiring in the money. Theta represents time decay, with long options having negative Theta and short options having positive Theta. Vega is the sensitivity to volatility, with options increasing in value when volatility increases. Rho is the least important Greek, representing sensitivity to interest rates.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    11 views1 page

    Option Greeks

    Uploaded by

    biswajit1011a
    The document defines and explains the Greeks, which are sensitivities of options to various factors like price movement, time decay, volatility, and interest rates. It describes Delta as the movement of an option position relative to the underlying asset's movement and indicates the probability of the option expiring in the money. Gamma is the rate of change of Delta and shows the odds of a change in the probability of expiring in the money. Theta represents time decay, with long options having negative Theta and short options having positive Theta. Vega is the sensitivity to volatility, with options increasing in value when volatility increases. Rho is the least important Greek, representing sensitivity to interest rates.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 1

    Greeks

    This is where we graphically explain each of the “Greeks.” The Greeks are simply sensitivities of options to various
    factors, such as price movement, time decay, volatility, and interest rates. The Greeks are as follows:

    Delta:
    The movement of the option position relative to the movement of the underlying (say, stock) position. The resulting
    figure gives us an indication of the speed at which the option position is moving relative to the underlying stock
    position. Therefore, a Delta of 1 means the option position is moving 1 point for every point the stock moves. A Delta
    of –1 means the option position is moving –1 point for every point the underlying stock moves.

    Typically, at-the-money options move with a Delta of 0.5 for calls and –0.5 for puts, meaning that ATM options move
    half a point for every 1 point that the underlying asset moves. This does not mean the option leg is moving slower in
    percentage terms, just in terms of dollar for dollar.

    Delta is another way of expressing the probability of an option expiring in-the-money. This makes sense because an
    ATM call option has a Delta of 0.5; i.e., 50%, meaning a 50% chance of expiring ITM. A deep ITM call will have a
    Delta of near 1, or 100%, meaning a near 100% chance of expiration ITM. A very out-of-the-money call option will
    have a Delta of close to zero, meaning a near zero chance of expiring ITM.

    So, Delta can be interpreted both in terms of the speed of the position and the probability of an option expiring ITM.
    Some advanced traders like to trade with the sum of their portfolio Delta at zero, otherwise known as Delta- Neutral
    trading. This is by no means a risk-free method of trading, but it is a style that enables profits to be taken regardless of
    the direction of market movement. However, this is only really suited to professional-style traders who have the very
    best technology solutions and a lot of experience.

    Gamma:
    Gamma is mathematically the second derivative of Delta and can be viewed in two ways: either as the acceleration of
    the option position relative to the underlying stock price, or as the odds of a change in probability of the position
    expiring ITM (in other words, the odds of a change in Delta). Gamma is effectively an early warning to the fact that
    Delta could be about to change. Both calls and puts have positive Gammas. Typically, deep OTM and deep ITM
    options have near zero Gamma because the odds of a change in Delta are very low. Logically, Gamma tends to peak
    around the strike price.

    Theta:
    Theta stands for the option position’s sensitivity to time decay. Long options (i.e., options that you have bought) have
    negative Theta, meaning that every day you own that option, time decay is eroding the Time Value portion of the
    option’s value. In other words, time decay is hurting the position of an option holder. When you short options, Theta
    is positive, indicating that time decay is helping the option writer’s position.

    Vega:
    Vega stands for the option position’s sensitivity to volatility. Options tend to increase in value when the underlying
    stock’s volatility increases. So, volatility helps the owner of an option and hurts the writer of an option. Vega is
    positive for long option positions and negative for short option positions.

    Rho:
    Rho stands for the option position’s sensitivity to interest rates. A positive Rho means that higher interest rates are
    helping the position, and a negative Rho means that higher interest rates are hurting the position. Rho is the least
    important of all the Greeks as far as stock options are concerned.

    You might also like