Greeks

SENSITIVITIES
Delta
is a risk sensitivity measure used in assessing derivatives hence they are often also called risk
measures, hedge parameters, or risk sensitivities.

Where:
It compares the change in the price of a derivative to the changes in the underlying asset’s
price This sensitivity measurement is one of the most important Greeks used in assessing
derivatives since it can be thought of as the probability that an option will end in the money.
Delta (cont’d)
It is very important to consider when determining the risk one is willing to take for a return of an
investment. The bank by only looking at the portfolio aggregate delta can help determine how it
would do in relation to changes in the overall market hence employing hedging techniques. The
delta value of an option can also be used in risk decision making of weather to short hand or long
hand the options .If the price of an option increases less than the delta would imply, it could
mean that traders are selling this option near the bid price. If the price is higher than the delta
would imply that traders were buying the options near the ask price
 Gamma
Where:
Gamma is the driving force behind changes in an options delta hence it represents the rate
change of an option delta as the stock prices moves.
Gamma (cont’d)
Higher Gamma values indicate that the delta could change dramatically with even very small
prices changes in the underlying stock or fund hence investors will access the Gamma value in
order to hedge against price movements. At-the –money options have the highest Gamma
because their Deltas are the most sensitives to underlying price changes. Investors use gamma
to measure the movement of delta and the stability hence there can track stability of the
probability Delta provides.
 Vega
Where:
Vega measures the risk of changes in implied volatility or the forward-looking expected volatility
of the underlying asset price. While delta measures actual price changes, vega is focused on
changes in expectations for future volatility.
Vega (cont’d)
Higher volatility makes options more expensive since there’s a greater likelihood of hitting the
strike price at some point. Vega tells us approximately how much an option price will increase or
decrease given an increase or decrease in the level of implied volatility.Option sellers benefit
from a fall in implied volatility, but it is just the reverse for option buyers.
Theta
Where:

Theta measures the rate of time decay in the value of an option or its premium. Time decay
represents the erosion of an option's value or price due to the passage of time. As time passes,
the chance of an option being profitable or in-the-money lessens. Time decay tends to
accelerate as the expiration date of an option draws closer because there's less time left to earn
a profit from the trade. Theta is always negative for a single option since time moves in the same
direction.
Theta (cont’d)
As soon as an option is purchased by a trader, the clock starts ticking, and the value of the
option immediately begins to diminish until it expires, worthless, at the predefined expiration
date. Theta is good for sellers and bad for buyers. A good way to visualize it is to imagine an
hourglass in which one side is the buyer, and the other is the seller. The buyer must decide
whether to exercise the option before time runs out. But in the meantime, the value is flowing
from the buyer's side to the seller's side of the hourglass. The movement may not be extremely
rapid, but it's a continuous loss of value for the buyer.
Rho
Rho is the rate at which the price of a derivative changes relative to a change in the risk free rate
of interest or sensitivity of option to a change in interest.