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Option Greeks

Option Greeks

Option Greeks measure the sensitivity of the option pricing represented by Delta, Gamma ,Theta , Vega and Rho.

Delta measures the sensitivity of the option value to a given small change in the price of the underlying asset.Delta is amount an option price expected to move based on $1move up on the underlying stock.

  • Delta for call option buyer is positive (value of contract increase as the share price rises).
  • Delta for Put Option buyer is negative (value of contract increase as the share price falls).
  • Delta is equal to change in option premium divided by unit change in the price of underlying asset.

Gamma

Gamma is connected with Delta. Gamma is the rate of change in delta based on $1 change in stock price. so if delta is the speed at which option price changes,you can think of gamma as the acceleration. Option with highest gamma are the most responsive to change in the price of underlying stock.
Gamma is highest near in the money.

  • Gamma is equals to Change in option delta divided by unit change in price of asset.
  • It measure change change in delta with respect to change in price of asset.

Theta (Time)

Theta is equal to change in option premium divided by change in time of expiry. Time decay is the enemy number one of option buyer. on the other hand, its usually the option seller’s best friend. Theta is the amount price of calls and puts decrease every single day as the option approaches its expiration date.

Vega (Volatility)

Vega is the amount call and put prices will change for every 1% change in implied volatility. vega does not have any affect on the intrinsic value of options and only affect the time value of an option price. That said implied volatility is the most critical element of an option in option pricing model because its the only unknown.

  • Vega is Positive for long call and long put.
  • Vega is equal to change in an option premium divided by change in volatility .

RHO

RHO measures the cost of funding the underlying asset.

Rho is equal to change in option Premium divided by change in interest rate.

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