Option

Greeks
Part I
 What are Option Greeks
● They are metrics that trades use to analyse the factors that
affect the price of an option.

● These greeks implicate PRICE, TIME & IMPLIED VOLATILITY.

● There are 5 major option Greeks—DELTA, GAMMA, THETA,

VEGA & RHO
 Intrinsic & Extrinsic Value
Intrinsic Value:

● Intrinsic value of an option exists when the option is in-the-money, which means the
option has inherent value due to its direct relationship to the current price of the
underlying asset.
● For call options, the intrinsic value is the difference between the current price of the
underlying asset and the option's strike price (if the asset's price is higher than the
strike price). For put options, it's the difference between the strike price and the spot
asset price (if the asset's price is lower than the strike price).
● Intrinsic value cannot be negative. If an option is out of the money (where exercising
the option wouldn't be profitable), it has no intrinsic value.

Extrinsic Value (Time Value):

● Extrinsic value, also known as time value, is the remaining value of an option beyond
its intrinsic value. It's the amount that traders are willing to pay for the potential
future movement of the underlying asset's price before the expiration.
● Extrinsic value takes into account factors such as time to expiration, market
volatility, interest rates, and potential news events that could affect the underlying
asset.
● As an option approaches its expiration date, its extrinsic value typically decreases,
because there's less time for significant price movements to occur.
How Intrinsic and Extrinsic is calculated
Suppose Nifty is at 19515 on Monday
Let’s consider 3 strikes

1) 19400 Call - Premium is ₹150

Here intrinsic will be 19515- 19400 = ₹115
& extrinsic will be 150-115 = ₹35

2) 19500 Call - Premium is ₹55

Here intrinsic will be 19515- 19500 = ₹15
& extrinsic will be 55-15 = ₹40

3) 19600 Call - Premium is ₹25

Here intrinsic will be 0 as intrinsic cannot be negative.
& extrinsic will be 25
 DELTA
● Like a Greek King, DELTA is the King of all the option Greeks.
It has the biggest impact on the options value.

● It tells how much the price of the option may change with 1 point change in the
underlying asset(eg. Nifty).

● Some traders also see Delta as a probability of the option expiring ITM.
Suppose an Option has delta of 0.2, then the probability of that option expiring ITM
is 20%.

● For call option, the delta ranges from 0 to 1.

● For put option, the delta ranges from 0 to -1
● The delta is higher is higher as the option is more ITM.
 Example-
Let assume the following parameters -

Nifty Strike - 19600 PE, Spot value at 19550, Premium at 125

Delta at - 0.58 (as strike price is at slightly ITM)

Anticipated Nifty Value at 19500

The objective is to evaluate the new premium value, considering the delta value of - 0.58

Anticipated change: Nifty moves from 19550 to 19500,

So Nifty loses 50 points.

Delta -0.58

= -0.58 x -50 = 29

New Premium = 125 (Current Premium) + 29

New Premium = 154, when NIfty reaches 19500

 GAMMA
● GAMMA is Delta’s right hand man.

● The rate of change of an option's delta in response to changes in the

price of the underlying asset.

● Delta doesn’t stay constant, it increases as the option goes more ITM
and decreases as the Option goes more OTM. Here gamma comes
into play.

● As expiration approaches, the gamma of options becomes more

pronounced, causing the delta to change more rapidly for small
price movements in the underlying asset.
 Gamma Spike
A "gamma spike" refers to a situation where an option's gamma experiences a
sudden and significant increase. This can occur for various reasons and often leads
to more pronounced changes in an option's delta for small price movements in the
underlying asset.

Possible Causes of a Gamma Spike:

● Near Expiration: As options approach their expiration date, gamma tends to

increase, leading to more dramatic changes in delta for small price changes in
the underlying asset.
● High Volatility: Increased market volatility can lead to higher gamma values,
especially for at-the-money options.
● Significant Price Movement: When the underlying asset experiences a
significant price movement, gamma values can spike, causing delta changes
to be more pronounced.
 THETA
● "Theta" is a term used in options trading to represent the rate at which
the value of an option (its premium) decreases as time passes, assuming
all other factors remain constant. It's also known as "time decay".

● Theta estimates how much a option’s premium is gonna be lost each

day.

● The impact of theta is more noticeable for shorter-term options. Options

that are out-of-the-money or at-the-money typically experience the
highest rate of theta decay as expiration nears.

● It works in favor of seller and against buyers

● Traders holding long options positions should be aware that the effects
of theta decay can become more pronounced in the final days leading
up to expiration.
Theta Decay example
Suppose Nifty is trading at 19,800 on Monday
You buy a ATM call option of strike 19,800 of Thursday expiry with
a premium of ₹100 and has Theta of -9.

If Nifty opens at 19800 of tuesday, then the premium of the

option will ₹91. Then if it goes again at 19800 on wednesday
then option premium will be ₹82.