Greeks
Option price Greeks are measures used to assess the sensitivity of an option's price to various factors. They are critical for options traders to manage risk and make informed trading decisions. Here are the main Greeks:
1. Delta (Δ)
Definition: Measures the sensitivity of an option's price to changes in the price of the underlying asset. It indicates how much the option price is expected to change for a ₹ 1 change in the underlying asset.
Range: For call options, delta ranges from 0 to 1; for put options, it ranges from -1 to 0.
Example: A delta of 0.5 means that if the underlying asset's price increases by ₹ 1, the option's price is expected to increase by ₹ 0.50.
2. Gamma (Γ)
Definition: Measures the rate of change of delta with respect to changes in the underlying asset's price. It indicates how much the delta will change for a ₹ 1 change in the underlying asset.
Purpose: Helps assess the stability of delta and indicates how the option's risk profile may change as the underlying price moves.
Example: A gamma of 0.1 means that if the underlying price increases by ₹ 1, the delta will increase by 0.1.
3. Theta (Θ)
Definition: Measures the sensitivity of the option's price to the passage of time, also known as time decay. It indicates how much the option's price will decrease as it approaches expiration.
Range: Typically negative for long options, as time decay erodes the value of options.
Example: A theta of -0.05 means the option's price will decrease by approximately ₹ 0.05 for each day that passes, all else being equal.
4. Vega (V)
Definition: Measures the sensitivity of an option's price to changes in the volatility of the underlying asset. It indicates how much the option's price is expected to change for a 1% change in implied volatility.
Purpose: Useful for assessing how changes in market volatility may affect the option's price.
Example: A vega of 0.2 means that if implied volatility increases by 1%, the option's price is expected to increase by ₹ 0.20.
5. Rho (ρ)
Definition: Measures the sensitivity of an option's price to changes in interest rates. It indicates how much the option's price will change for a 1% change in interest rates.
Purpose: Important for assessing the impact of interest rate changes on the value of options, especially for longer-dated options.
Example: A rho of 0.05 means that if interest rates increase by 1%, the option's price is expected to increase by ₹ 0.05.