To be a seasoned trader in options, just understanding the options brokerage calculator is not enough. For that, you will need to learn to predict the price of a single option or in certain other cases, a position involving multiple options. When the price of an option is not in tandem with the price of the underlying asset, what will you do? In such cases, you need to learn about the various factors affecting the price movement of options. Learning about options greeks will help you with that.
What are Options Geeks?
Options Greeks are tools that will equip you with the knowledge to make informed decisions while trading options. They help in indicating the sensitivity of option price with time, track the anticipated volatility coming with market uncertainties and the price movements of the underlying asset.
Important Greek Risk Measures
- Delta – Sensitivity of an option’s price to changes in the value of the underlying security.
- Gamma- Tracks the change in delta with changes in stock prices.
- Theta – Rate of time-decay of an option
- Vega – Evaluate the sensitivity of an option to large price swings
- Rho- Incorporates the interest rate change effect on option.
These are some important tools that you need in options trading other than options brokerage calculator.
How do Greeks work?
When an option typically moves less than the underlying stock, Delta is used to find how much it is expected to move when the stock moves Rs.1. If we know that an option loses value over time, we can use Theta to approximate how much value it loses each day.
Delta measures how much an option’s price is expected to change per change of Rs.1 in the price of the underlying security or index. A Delta of 0.40 means that the option’s price will theoretically move Rs 0.40 for every Rs.1 move in the price of the underlying stock or index(1.4). Delta could be thought of as the probability that a given option will expire in the money. So, a Delta of 0.40 means the option has about a 40% chance of being in the money at expiration. Still, the profitability of the trade depends upon the price at which the option is bought or sold.
Gamma tracks delta. Let’s see how
- Have a positive Delta that can range from 0.0 to 1.00.
- At-the-money options usually have a Delta near 0.50.
- The Delta will increase (and approach 1.00) as the option gets deeper in the money.
- The Delta of in-the-money call options will get closer to 1.00 as expiration approaches.
- The Delta of out-of-the-money call options will get closer to 0.0 as expiration approaches
For Put options, every change is in negative values and is the reverse of call options,
Time-value of option per day. A theta of -0.04 indicates, the option loses by 40 paise per day.
Vega shows the change in premium with every 1% of implied volatility. If the Vega of an option is 0.03 and the implied volatility decreases by 1%, the option price falls by 30 paise and vice versa for increased volatility. Volatility depends upon global markets, political conditions, weather, pandemics, etc.,
Similarly, Rho reflects the interest changes.
Taken together, they are very significant in tracking the price movements of options. Other than options brokerage calculator, a good trading platform have these computerized tools too which could be used to trade options effectively. Trade wisely, reap benefits.
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