OPTION GREEKS

WHAT IT IS?
 the Greeks are a series of handy variables that help explain the various factors
driving movement in options prices
 the Greeks are the quantities representing the sensitivity of the price
of derivatives such as options to a change in underlying parameters on which
the value of an instrument or portfolio of financial instruments is dependent.
 Collectively these have also been called the risk sensitivities, risk
measures or hedge parameters.
 The Greeks are vital tools in risk management
DELTA: THE HEDGE RATIO

 The Degree Of Change In Option Price In Relation To A Change In The Price Of

The Underlying Asset.
 Its given by the formula 

S

The Relationship between the Price of a Call Option

and the Price of Its Underlying Asset
 Variation of Delta for call and put option

Variation of Delta with time to maturity for a call

option
 GAMMA: THE RATE OF CHANGE OF
DELTA
 Rate of change of delta respective to the rate of change of underlying asset
  2
 Its given by the formula    2
S S

 An Indicator Of How Stable Delta Is

 if you look at delta as the “speed” of your option position, gamma is the “acceleration”.
 Gamma is positive when buying options and negative when selling them. Unlike delta,
the sign is not affected when trading a call or put.
 Gamma is highest for near-term ATM strikes, and slopes off toward ITM, OTM, and far-
term strikes.
 Variation of Gamma for stock option

Variation of Gamma with time to maturity for a call option

THETA: TIME DECAY
 Theta measures the change in the price of an option for a one-day decrease in
its time to expiration
 Theta tells you how much the price of an option should decrease as the option
nears expiration.
 Because time-value erosion is not linear, Theta of at-the-money (ATM), just
slightly out-of-the-money and in-the-money (ITM) options generally increases
as expiration approaches, while Theta of far out-of-the-money (OOTM) options
generally decreases as expiration approaches.
 Variation of Vega for call option

Variation of Theta with time to maturity for a call

option
VEGA: V IS FOR VOLATILITY

 to tell you how much an option's price should move when the volatility
of the underlying security or index increases or decreases.
 Vega measures how the implied volatility of a stock affects the price of
the options on that stock.
 Volatility is one of the most important factors affecting the value of
options.
 Neglecting Vega can cause you to "overpay" when buying options.  All
other factors being equal, when determining strategy, consider buying
options when Vega is below "normal" levels and selling options when
Vega is above "normal" levels.
 A drop in Vega will typically cause both calls and puts to lose value.
 An increase in Vega will typically cause both calls and puts to gain value.
Variation of Vega for stock option
RHO: INTEREST RATES

 Rho measures the expected change in an option's price per 1% change in

interest rates. It tells you how much the price of an option should rise or fall if
the “risk-free” interest rate increases or decreases.
 As interest rates increase, the value of call options will generally increase.
 As interest rates increase, the value of put options will usually decrease.
 For these reasons, call options have positive Rho and put options have negative
Rho.