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Option Greeks


Why to understand Options Greeks?

As Options are having lot of different combinations and pay off, it is required to understand the Option Greeks to play these Options Strategies properly. Greeks describe the change in Options Premium with respect to change in different market variables.

How Option Greeks can reduce the risk in Options Trading:

As we discussed earlier, Option Greeks shows the exact change in Option Price with respect to change in different variables. So it becomes very easy for the trader to understand whether Increase in Spot is favorable to him or decrease in Spot price. Whether rise in Volatility will make money for him or fall in Volatility and he is going to make money or lose money as the time reaches to maturity.
Greeks shows us the degree of risk and return we are taking in Options Strategies. So we can adjust all the Greeks as per our risk taking ability.

Options Pricing:

There are mainly two popular Options pricingmodel which we use for calculation of Premium of Options.

  1. Black Scholes Pricing Model
  2. Binomial Pricing Model

The main variable which are used to calculate the Options Premium are

  1. Spot Price
  2. Strike Price
  3. Volatility
  4. Time to Maturity
  5. Rate of Interest

Relationship of Variables with Options Pricing:

Relationship of variables with Options pricing shows the impact on Options premium with respect to change in variables.

Spot Price is having positive relation with Call Option and negative relation with Put Option.
Strike Price is having negative relation with Call Option and positive relation with Put Option.
Time is having negative relation with Call and Put Option.
Volatility is having positive relation with Call and Put Option.
Rate of Interest is having positive relation with Call Option and negative relation with Put Option.

Options Greeks:

As premium of Options get affected by many variables, it requires to understand how price of Option moves. Options Greeks gives exact idea of fraction of movement in Options Premium. There are mainly five Options GreeksDelta, Gamma, Vega, Theta and Rho.

Delta:

Delta shows you the change in Options Premium with respect to 1 Rupee change in Spot price of Underlying. Call Delta always remains positive while Put Delta always remains negative.

Gamma:

Gamma shows you the change in Options Delta with respect to 1 Rupee change in Spot price of Underlying. Both Call and Put Gamma always remain positive.

Vega:

Vega shows you the change in Options Premium with respect to 1 Percent change in Volatility. Both Call and Put Vega always remain positive.

Theta:

Theta shows you the change in Options Premium with respect to 1 Day change in Time. Both Call and Put Theta always remain negative.

Rho:

Rho shows you the change in Options Premium with respect to 1 Percent change in Rate of Interest. Call Rho always remains positive while Put Rho always remains negative.

Volga:

Volga shows you the change in Vega with respect to 1 percent change in Volatility.

Vanna:

Vanna shows you the change in Delta with respect to 1 percent change in Volatility. It also shows you change in Vega with respect to 1 Rupee change in Spot Price.





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