Option Greeks

Sabareesh Krishnamoorthy

19-Jul-2020
Objective

1. Quick look at Delta, Gamma, Theta, Vega, Rho - their significance

2. Importance of Delta, Theta and Vega
3. Insights from Futures and Options Open interest data
Delta
1. Price sensitivity - i.e. How will the option’s price change when Price of underlying
changes
2. Practical meaning - Probability that the option will end up profitable for the buyer (i.e.
option will expire ITM)
3. Treat Delta like velocity for an option or slope or first level derivative (dx/dt)
4. Delta is mainly affected by Underlying price and Time to expiry
5. As it is a probability - Delta is between 0 to 1 : positive for Calls and negative for Puts
6. New option price = Old price + delta * change in underlying price (y = mx + c)
Theta - Time Decay
1. Time sensitivity - how much does time
reduce the option premium
2. Causes a drop in both Calls and Puts
3. Decay is exponential
4. Option’s buyer’s enemy #1
5. Option seller’s best friend!
6. Theta is a negative number and
usually denoted the loss in value per
lot.
7. Theta & Delta are lower for options
away from the strike price
Vega

1. Sensitivity to implied volatility - i.e.

how much will the option premium
change if implied vol changed by 1
point.
2. Call & Put options become more
expensive when volatility increases
3. Volatility usually increases more
sharply when prices are falling.
Gamma

1. If Delta is like Velocity, Gamma is like acceleration or 2nd level derivative

2. While Buying, we can look for Higher gamma options as if we are right in our
predictions, option premium will go up faster.
3. While selling we can look for lower gamma options as it will give some protection.
4. Gamma is typically used only by high volume traders.
Option Greek Matrix

Effect On Option Call Put

Premium

Underlying Price

Delta

Gamma

Theta

Vega
Reading Open Interest (OI) &
Put-Call Ratio (PCR)

1. High Options OI in calls - means large players are selling calls - i.e. indicates
resistance
2. High Option OI in Puts - Indicates support
3. Increase in Futures OI - indicates bullishness
4. Put Call Ratio = Num Puts/Num Calls
a. PCR close to 1 (0.9 to 1.1) - Pivot
b. PCR > 1.1 but < 1.3 = Not bearish and Turning Bullish
c. PCR < 0.9 but > 0.7 = Not Bullish and turning Bearish
d. PCR < 0.6 = Bearish
e. PCR > 1.4 = Bullish
Reading OI & PCR - BNF (17-Jul)
OI & PCR of Nifty (17-Jul)
Useful Links
OI & PCR https://www.bloombergquint.com/markets/option-chain/put-call-ratio

FII DII Activity https://www.equityfriend.com/investment-charts/fpi-chart-fii-chart-dii-chart.html

https://www.moneycontrol.com/stocks/marketstats/fii_dii_activity/index.php

Good reads https://www.optionsplaybook.com/options-introduction/option-greeks/

https://fyers.in/school-of-stocks/chapter/options/introduction-to-option-greeks.html

Google Sheet- FO https://docs.google.com/spreadsheets/d/1JN2i0UoNVt8VAhgLa8sKju9V7_YAFM81l1HdUlQ9J

and my scans y8/edit?usp=sharing

https://chartink.com/dashboard/18479#atlas-tabs-root?source=social-icons

Long Unwinding etc https://www.indiainfoline.com/markets/derivatives/long-unwinding