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Options Greeks - A Complete Guide

The document provides a comprehensive guide to Options Greeks, which are key risk metrics that help traders understand how sensitive an option's price is to various market factors. It covers the primary Greeks: Delta, Gamma, Theta, Vega, and Rho, detailing their definitions, interpretations, and impacts on options trading. Mastering these Greeks is essential for effective risk management and strategy optimization in options trading.

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Sanjeev RK
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180 views2 pages

Options Greeks - A Complete Guide

The document provides a comprehensive guide to Options Greeks, which are key risk metrics that help traders understand how sensitive an option's price is to various market factors. It covers the primary Greeks: Delta, Gamma, Theta, Vega, and Rho, detailing their definitions, interpretations, and impacts on options trading. Mastering these Greeks is essential for effective risk management and strategy optimization in options trading.

Uploaded by

Sanjeev RK
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Options Greeks – A Complete Guide

1. Introduction

Options trading involves complex price behavior influenced by multiple market factors.
The Greeks are key risk metrics that help traders measure how sensitive an option's price is to
changes in underlying variables like price, volatility, time, and interest rates.
Mastering the Greeks allows traders to better manage risk and optimize strategies.

2. The Primary Greeks

2.1 Delta (Δ) – Price Sensitivity

 Definition: Measures the rate of change in the option’s price for a ₹1 change in the
underlying asset’s price.

 Range:

o Calls: 0 to +1

o Puts: 0 to –1

 Interpretation:

o Delta of 0.6 → Option price will increase by ₹0.60 for every ₹1 rise in the underlying.

o Delta also indicates probability of the option expiring in the money.

 Impact:

o High delta = option behaves more like the stock.

o Low delta = less sensitive to price movement.

2.2 Gamma (Γ) – Delta’s Rate of Change

 Definition: Measures the rate of change of Delta for every ₹1 change in the underlying asset.

 Purpose:

o Helps understand how stable or unstable Delta is.

o High Gamma means Delta will change rapidly.

 Characteristics:

o Highest for At-the-Money options.

o Decreases as the option goes deeper In- or Out-of-the-Money.

2.3 Theta (Θ) – Time Decay

 Definition: Measures how much the option’s price decreases per day as expiry approaches
(all else equal).
 Interpretation:

o A Theta of –0.05 means the option loses ₹0.05 in value per day.

 Impact:

o Negative for buyers of options.

o Positive for sellers of options.

 Key Point: Time decay accelerates as expiration nears.

2.4 Vega (ν) – Volatility Sensitivity

 Definition: Measures the change in the option’s price for a 1% change in implied volatility.

 Interpretation:

o Vega of 0.12 means a 1% rise in volatility increases the option’s price by ₹0.12.

 Impact:

o Long options benefit from rising volatility.

o Short options benefit from falling volatility.

2.5 Rho (ρ) – Interest Rate Sensitivity

 Definition: Measures the change in an option’s price for a 1% change in interest rates.

 Interpretation:

o Rho of 0.05 means a 1% rise in interest rates increases the option’s price by ₹0.05.

 Impact:

o More relevant for long-term options.

o Minimal effect for short-term traders.

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