What are option greek in derivative market.
How to Understand Option Greeks /Option Greeks Explained.
Option Greeks
Option premiums change with changes in the factors that determine option pricing i.e. factors such as strike price, volatility, term to maturity etc. The sensitivities most commonly tracked in the market are known collectively as “Greeks” represented by Delta, Gamma, Theta, Vega and Rho.
Delta = Change in option premium/ Unit change in price of the underlying asset.
Delta for call option buyer is positive. This means that the value of the contract increases as the share price rises. To that extent it is rather like a long or ‘bull’ position in the underlying asset. Delta for call option seller will be same in magnitude but with the opposite sign (negative). Delta for put option buyer is negative. The value of the contract increases as the share price falls.
This is similar to a short or ‘bear’ position in the underlying asset. Delta for put option seller will be same in magnitude but with the opposite sign (positive). Therefore, delta is the degree to which an option price will move given a change in the underlying stock or index price, all else being equal. The knowledge of delta is of vital importance for option traders because this parameter is heavily used in margining and risk management strategies. The delta is often called the hedge ratio, e.g. if you have a portfolio of ‘n’ shares of a stock then ‘n’ divided by the delta gives you the number of calls you would need to be short (i.e. need to write) to create a hedge. In such a “delta neutral” portfolio, any gain in the value of the shares
held due to a rise in the share price would be exactly offset by a loss on the value of the calls written, and vice versa.
What are option greek in derivative market / | Delta | Gamma | Theta | Vega | Rho
Gamma = Change in an option delta / Unit change in price of underlying asset
Gamma works as an acceleration of the delta, i.e. it signifies the speed with
which an option will go either in‐the‐money or out‐of‐the‐money due to a change in price of the underlying asset.
Theta = Change in an option premium / Change in time to expiry
Usually theta is negative for a long option, whether it is a call or a put. Other things being equal, options tend to lose time value each day throughout their life. This is due to the fact that the uncertainty element in the price decreases.
Vega = Change in an option premium / Change in volatility
Vega is positive for a long call and a long put. An increase in the assumed volatility of the underlying increases the expected payout from a buy option, whether it is a call or a put.
Rho = Change in an option premium / Change in cost of funding the
underlying.
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That’s it for this post. Do check out my other posts to gain more knowledge about finance.
https://finosutra.blogspot.com/2020/05/what-is-clearing-corporation-and.html
https://finosutra.blogspot.com/2020/05/tool-of-derivative-contract.html
How to Understand Option Greeks /Option Greeks Explained.
Option Greeks
Option premiums change with changes in the factors that determine option pricing i.e. factors such as strike price, volatility, term to maturity etc. The sensitivities most commonly tracked in the market are known collectively as “Greeks” represented by Delta, Gamma, Theta, Vega and Rho.
1) Delta (δ or ∆)
The most important of the ‘Greeks’ is the option’s “Delta”. This measures the sensitivity of the option value to a given small change in the price of the underlying asset. It may also be seen as the speed with which an option moves with respect to price of the underlying asset.Delta = Change in option premium/ Unit change in price of the underlying asset.
Delta for call option buyer is positive. This means that the value of the contract increases as the share price rises. To that extent it is rather like a long or ‘bull’ position in the underlying asset. Delta for call option seller will be same in magnitude but with the opposite sign (negative). Delta for put option buyer is negative. The value of the contract increases as the share price falls.
This is similar to a short or ‘bear’ position in the underlying asset. Delta for put option seller will be same in magnitude but with the opposite sign (positive). Therefore, delta is the degree to which an option price will move given a change in the underlying stock or index price, all else being equal. The knowledge of delta is of vital importance for option traders because this parameter is heavily used in margining and risk management strategies. The delta is often called the hedge ratio, e.g. if you have a portfolio of ‘n’ shares of a stock then ‘n’ divided by the delta gives you the number of calls you would need to be short (i.e. need to write) to create a hedge. In such a “delta neutral” portfolio, any gain in the value of the shares
held due to a rise in the share price would be exactly offset by a loss on the value of the calls written, and vice versa.
What are option greek in derivative market / | Delta | Gamma | Theta | Vega | Rho
2) Gamma (γ)
It measures change in delta with respect to change in price of the underlying asset. This is called a second derivative option with regard to price of the underlying asset. It is calculated as the ratio of change in delta for a unit change in market price of the underlying asset.Gamma = Change in an option delta / Unit change in price of underlying asset
Gamma works as an acceleration of the delta, i.e. it signifies the speed with
which an option will go either in‐the‐money or out‐of‐the‐money due to a change in price of the underlying asset.
3) Theta (θ)
It is a measure of an option’s sensitivity to time decay. Theta is the change in option price given a one‐day decrease in time to expiration. It is a measure of time decay. Theta is generally used to gain an idea of how time decay is affecting your option positions.Theta = Change in an option premium / Change in time to expiry
Usually theta is negative for a long option, whether it is a call or a put. Other things being equal, options tend to lose time value each day throughout their life. This is due to the fact that the uncertainty element in the price decreases.
4) Vega (ν)
This is a measure of the sensitivity of an option price to changes in market volatility. It is the change of an option premium for a given change (typically 1%) in the underlying volatility.Vega = Change in an option premium / Change in volatility
Vega is positive for a long call and a long put. An increase in the assumed volatility of the underlying increases the expected payout from a buy option, whether it is a call or a put.
5) Rho (ρ)
Rho is the change in option price given a one percentage point change in the risk‐free interest rate. Rho measures the change in an option’s price per unit increase in the cost of funding the underlying.Rho = Change in an option premium / Change in cost of funding the
underlying.
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The analogy I have used might not be 100% correct but it’s easy to understand things with a simpler analogy.
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That’s it for this post. Do check out my other posts to gain more knowledge about finance.
https://finosutra.blogspot.com/2020/05/what-is-clearing-corporation-and.html
https://finosutra.blogspot.com/2020/05/tool-of-derivative-contract.html
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