What are different type of Greeks?

Greeks are the most important part of options trading. It is very crucial to understand them and their inter linkages before you start trading options. As overwhelming they seem in the beginning they become equally interesting once a trader understands them well.

Today, we shall look at three most important Greeks; Delta, Vega and Theta and understand their impact on option prices and each other.

Delta:

• The change in the price of the option due to the change in the price of the underlying is termed as the delta of that option.
• The value of delta is between –1 to +1. In case of calls the value of delta is between 0 to 1 while in case of puts it is between –1 to 0.
• In case of calls there is a direct relation between spot price and option price, i.e if the stock price increases the price of the option increases and vice versa.
• So a deep in the money call option has a delta near to 1 and a deep out of the money call option has a delta near to 0. At the money call options trade at a delta near to 0.5.
• But in case of puts the relation between option price and spot price is inverse. If the spot price increases the profit on an in the put reduces and the loss on an out of the money put increases.
• So a deep out of the money put option would trade near to 0 and a deep in the money put option has a delta near to -1. At the money put options trade at a delta near to -0.5.
• Thus, for an out of the money call option the impact of change in the price of the underlying is lower as compared to an in the money call option.
• The impact of change in time to expiry or volatility is very less on the delta of an ATM option.
• As the volatility increases the delta of an OTM option increases.
• However, for an ITM strike as the volatility increases the impact is on the extrinsic value only and not the intrinsic value, so delta decreases.
• As the time to expiry is nearing, the extrinsic value of an option is decreasing, this makes the delta on an OTM option to tend towards 0 and an ITM option to tends towards 1.
• For ITM options longer the duration lower the delta, so next month option will have a lower delta as compared to current month option.
• For OTM options longer the duration higher the delta, so next month option will have a higher delta as compared to current month option.

Vega:

Vega, the Greek connected to change in IVs helps us quantify the impact of change in IVs on our options position. For example, if the theoretical price an option is 2.5 and the Vega is showing 0.25, then if the volatility moves from 20% to 21% the theoretical price will increase to 2.75 keeping other things the same.

The crucial things one needs to bear in mind regarding Vega are:

• Vega is the change in price of an option due to 1% change in the implied volatility
• It is same for both calls and puts. If you are long options, you have a positive Vega and if your short options you have a negative Vega.
• For options with longer duration the Vega is high as the volatility is perceived to be higher in case of an option with a longer duration.
• Vega can change even if there is no change in the price of the underlying asset, this would happen if there is a change in expected volatility.
• Vega falls as the option gets closer to maturity
• Like gamma and theta, it is highest for At the Money options because it has the maximum time value.
• There is a direct correlation between Vega and gamma. When an options gamma is high, the Vega moves higher as well.

Among all the Greeks, Theta is the most interesting Greek. It is the time value of the option. It’s the reward one wins or price one pays for non-action in the underlying. This Greek has the potential to make a perfect view look like the most imperfect strategy.

A few basic things that one needs to keep in mind about Theta while making a strategy are as under:

• Theta indicates the change in the price of the as the time to expiry approaches.
• This factor is also called “time decay” or “Extrinsic Value” of an option.
• The theta of an option with shorter duration is higher as compared to that of one with longer duration.
• Theta has a direct relation with volatility. Higher the volatility, higher the Theta.
• Like gamma and Vega it is same for both call and put. The difference is in the position taken. An option buyer will have negative Theta and an option seller will have positive Theta.
• For a buyer of an option, it is the daily cost that an option buyer pays for hedging or transferring his risk and in case of a seller it is his income for taking the risk. It is highest for at the money strikes.
• As the expiry nears we see huge reduction (non – linear) in value of option due to theta.
• For ATM option Theta increases as an option goes closer to expiry.
• For OTM & ITM option Theta decreases as an option is approaching expiry.
• When IV decreases Theta will be lower, especially when it is approaching expiry.
• When IV increases Theta will be higher, this is because time value part of more volatile stock is higher & therefore have more to lose per day as time passes.i

Next time when you trade options, you will know what is working for in your favor and what is working against your trade. If you would like to know more in-depth then do unlock all your questions in our FREE F&O Seminars 

Happy Trading.

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