Option Pricing

Group 13

Abhishek Kumar
Joydeep Gorai
Sanjaykumar Vasava
Smrutiranjan Sahu
Focus
Options Premiums, options Greeks, and the
natural demand supply situation of the markets
influence each other. Though all these factors
work as independent agents, yet they are all
intervened with one another. The final outcome
of this mixture can be assessed in the option’s
premium. For an options trader, assessing the
variation in premium is most important. He
needs to develop a sense for how these factors
play out before setting up an option trade.
Delta
Measures the rate of change of options premium based on the directional
movement of the underlying

The delta is a number which varies

Between 0 and 1 for a call option, some traders prefer to use the 0
to 100 scale. So, the delta value of 0.55 on 0 to 1 scale is equivalent
to 55 on the 0 to 100 scale.

Between -1 and 0 (-100 to 0) for a put option. So, the delta value of -
0.4 on the -1 to 0 scale is equivalent to -40 on the -100 to 0 scale

The value of the delta is one of the many outputs from the Black &
Scholes option pricing formula. As I have mentioned earlier in this
module, the B&S formula takes in a bunch of inputs and gives out a
few key outputs. The output includes the option’s delta value and
other Greeks.
Theta
Time decay, theta burn, and theta decay are
synonymous and refer to the decline in the value of an
options contract as expiration approaches. Time decay
is non-linear, meaning the rate of change increases as
the options contract approaches expiration
Vega
The Vega value tells you how much the price of an option should increase by for every percentage point increase in the implied volatility of the
underlying security.

Vega is affected by two factors: moneyness and the amount of time left until the expiration date.

It's typically at its highest when an options contract is at the money, and then reduces if the contract moves into the money or out of the money

The Vega value will be higher when there is a long time until expiration and lower when there is less time until expiration

Vega can be very useful in forecasting how the price of an option is likely to move, it really is worth putting in some time to understanding just what
volatility and implied volatility is all about