If you do options trading, then it is very important to know about option greeks before doing options trading, because there are four factors of option greeks, which easily explain the change in option. With the help of this it becomes easy to do option trading and it helps us to buy any option and sell it at the right time.
When there is a change in the index or any stock, there is a change in the calls and puts of that stock or index, which is a very important role of option greeks.
So let us understand all four factors one by one about
When there is a change in any stock or index, the price of the option also changes, to which Delta has a very important contribution. Some important things about Delta that you always have to remember.
- The value of delta for a call option is always 0 to 1, which is positive, cannot be negative than zero, and the value cannot be greater than one, the value of a call option is always positive. . Because the price of the option increases when the call option market moves from the bottom to the top.
- The value of the delta for a put option is always -0 to -1, which is always negative and can never be positive. -0 to -1, because the price of the put option increases only when the market moves from top to bottom.
- The value of the delta for AT THE MONEY option in any index or stock is always around 0.45 to 0.55. The value of the delta for IN THE MONEY option is always above 0.50. The delta value for the OUT THE MONEY option is always less than 0.45.
REFERENCE BY SENSIBULL (CREDIT GOES TO SENSIBULL)
The chart above you can see is taken from Sensibull. There is data from the Nifty index, in which the value of delta of each strike is given. That is, each strike on the side of the call option has a different delta value. As mentioned above, the value decreases more and more according to In the Money, At the Money, Out the Money, in the same way the data of Put option is also shown, in Put option when the market moves from top to bottom, If it is in decline.
Then the price of the put option increases. Whose value is always negative, in this also all the strikes have different values according to in the money, at the money and out of the money.
For example, we take a strike, and also take At the money Premium price of that strike. Let us calculate how the option price also changes when the index changes.
For an at-the-money call option on index 17500, the value of delta is 0.55, so if the Nifty index moves by 1 point then a change of 0.55 will be the change in the call option of that strike as well. By doing this, if there is a change of 10 points in the Nifty index, in which Nifty reaches 17500 to 17560, then the calculation will be something like this.
MOVEMENT (10) × (0.55) DELTA VALUE = 5.55
Similarly, for put options, the delta of the 17550 put option is negative 0.50, so if there is a 1-point fall in Nifty here, then that 17550 put option will change by 0.50.
While doing this, if there is a fall of 10 points in the Nifty index, then its calculation will be something like this.
MOVEMENT (10) × (-0.50) DELTA VALUE = -5.50
One more thing to be understood here is that, if there is a change of 40 to 50 points in Nifty, then the value of delta will also change. As the 17500 call option has a delta value of 0.55 and the 17550 put option has a negative 0.50, the value will not remain the same. If Nifty moves up then that 17500 call option will become in the money. There the value of delta will increase from 0.55 to 0.60 or so, if Nifty moves higher, it will increase further.
Due to which the value of delta will go on increasing and on being deep in the money, its maximum value will be up to 1, and it will not be more. If Nifty moves by 1 point when the value of Delta is 1, then the 17500 call option will also move by 1 point, similarly the same method will work for the put option in case of a market downtrend.
Therefore the option buyer should always at the money The option should either be an in-the-money option. So that when there is a change in the index, there will be more change in its option and we can earn a big profit from it.
Gamma measures the change in delta, when there is a change in any stock or index, gamma also changes continuously, which also works to measure the change in delta due to that change in the stock or index.
Gamma How much the value of delta will change in the premium of the strike of an index can also be ascertained by Gamma.
As shown in the below chart for the strike of NIFTY, the value of both Call and Put is shown.
From this, we take the example of the call option so that we can do the calculation.
NIFTY 17500CE price Rs 187.25
DELTA value 0.55
GAMMA value 0.001
And the price of Nifty is 17500, if Nifty moves up by 50 points, then the calculation in theta will be something like this.
NIFTY SPOT PRICE 17500 + 50 (Change) = 17550 (NIFTY NEW SPOT PRICE)
DELTA VALUE (0.55) × (50) NIFTY CHANGE POINTS= 27.5
NIFTY 17500CE old price 187.25, after 50 POINT change new price will be 187.25+27.50= 214.75
The value of GAMMA is 0.001, for a 50-point change in Nifty, the changed point will be multiplied by the value of Gamma.
New gamma value = old gamma value (0.001)× (50) NIFTY CHANGE POINTS= 0.05
So for a 50-point change in Nifty, the new Gamma value will be 0.05, which will be used to add the old value of Delta.
So we can say that before the 50-point change in Nifty, the value of the delta was 0.55, now
That new value of data = old data value (0.55) + the new value of gamma after 50 point change (0.05) = 0.60 thus new value of delta has become. 0.60 is the new delta value, from here on the Nifty will change by 0.60 per point.
So this way gamma measures the change in delta, where a 50-point change is a 0.05 change in delta.
Theta tries to tell, how much time is left for the option to expire on any stock or index, Theta refers to the time decay (TIME DECAY) of the option. The value of theta is always negative for both the call option and the put option, as the time given to the option expires gradually.
Theta is the enemy of option buyers because the value of theta decreases with time. After buying the option, the buyer of the option can earn profits if the market moves accordingly.
If the direction of the market is reversed or if there is no change in the market, then in both cases losses have to be incurred.
Theta is a friend to option sellers, where the value of theta decreases over time, and the seller benefits even if the index or stock does not change.
After selling the option to the option seller, profit can be made if the market moves according to them, but even if the value of theta is low, even if the market does not change, profit can be made. Only if the market moves against the position created according to it, there can be a loss.
In the above picture, you can see that the value of 17500CE, 17550CE & 17550 PE and 17600 PE is negative 14 in both calls and put, which shows how long the option premium for that strike is TIME DECAY every single day Happening.
Before understanding theta, let us understand some important things so that theta can be understood well.
How is the premium for any index or stock option determined?
OPTION PREMIUM = INTRINSIC VALUE + TIME DECAY
The option premium is calculated by adding the INTRINSIC VALUE and the remaining TIME DECAY.
Let us understand it briefly.
The SPOT PRICE of NIFTY is 17500 and the value of NIFTY 17400CE is Rs 250 as shown in the chart of Sensibull. Where the strike price of Nifty 17400 is 100 points above the spot price of Nifty, then we can say that 100 (17500-17400) points are our INTRINSIC VALUE, and the remaining Rs 150 is TIME DECAY.
- Nifty and Bank Nifty options have WEEKLY & MONTHLY expiry, while Stock options have MONTHLY expiry. This means the option expires on every Thursday in WEEKLY expiry, and a new expiry starts from Friday.
On Friday, the premium price of the option will be higher because there is more time left for the option to expire. As the time frame decreases, the premium value of the option will also decrease if the Nifty does not change much.
If Nifty does not change much on Monday, then the value of TIME DECAY will decrease, due to which the premium price of the option will also decrease. Similarly, in the above example, if the price of 17400 is around 17500, if Nifty does not change, then we will get only INTRINSIC VALUE, which will be worth ₹100 only.
Let’s take another example of NIFTY 17500 CE, where the value of NIFTY 17500 CE is Rs 187.25, in which INTRINSIC VALUE is zero, and ₹ 187.25 is full-TIME DECAY, so if the number of positive points Nifty closes above 17500 here, we will get If it closes below 17500, its INTRINSIC VALUE will be paid, then TIME DECAY VALUE will be zero at expiry.
Let us take the third example of NIFTY 17800 CE, where the value of NIFTY 17800 CE is Rs 69, in which INTRINSIC VALUE is zero, only TIME DECAY is Rs 69, where if NIFTY does not go above 17800 till the day of expiry, then NIFTY 17800 The premium will be zero on the day of expiry.
By the way, if we talk about MONTHLY expiry, then MONTHLY expires in 1 month, which will expire on the last Thursday of that month.
If the option has 1 month to expiry, then the option price will be higher. Because the option has enough time to expiry, if the option has less time to expiry, the option price will be lower as half of the TIME DECAY has elapsed. If the option has only 1 or 2 days left to expire, the option will be worth very little because the TIME DECAY will be almost 0, leaving only the INTRINSIC VALUE.
- Let’s understand it in simple language.
As above NIFTY 17500 CE is the option premium for expiry on 22nd Sep 2022. Which costs ₹ 187, and has 5 days left to expire. Hence its premium cost is only ₹187. Next to it is NIFTY 17500, the option premium for expiry on 29th Sep 2022. The cost of which is ₹ 293, here you can see that both the options are of Nifty’s strike 17500CE only.
But the option premium for both is different because of the difference in expiry. The ₹293 option premium has more time to expiry. In this way, we can say time is money.
How much does Vega work in the market?
Volatility Based on these, the work of showing the change in the option premium is done by Vega Greek. When the volatility is high in the market, there is a sharp fall or rise in the premium of the option, the increase in the premium of the option vega indicates a decline.
It is worth noting that high the volatility makes the option premium more expensive. Since the strike premium changes very quickly due to volatility, usually when the volatility is low, the option writer makes more profit and vice-versa for the option buyer.
Since long option traders profit when prices rise, and short option traders profit when prices fall, this is why long options have positive vega while short options have negative vega.
For example, in the figure shown above, the 17500 strike is worth 187.25, volatility 18.50 is and vega is 9
Now suppose that when volatility 18.50 increases to 21.5, which means 3 points volatility there is an increase in So now the value of the option will increase to 3 x 9 = ₹ 27. Means premium = 187+27 will be ₹ 214