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OPTIONS GREEKS

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Abhijeet S
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OPTIONS GREEKS - September 2nd, 2010

OPTIONS GREEKS
  • The option Greeks are the tools that measure the sensitivity of the option price
  • They Estimate the change in the option premium under various circumstances
  • Determine the number of option needed in the event of hedging
  • They are often used by professional traders for trading & managing the risk of large positions in options & stocks.


Delta:
  • Delta is the ratio of change in the option price to a unit change in the underlying price.

  • Measure the estimated change in the option premium for the change in asset price.

  • ITM option have higher delta (0.8) while OTM option have lower delta (0.2)


Delta= Change in the Option Premium
Change in the Underlying Price




GAMMA:
  • GAMMA is the ratio of change in the option delta to a unit change in the underlying price.

  • If gamma is positive it indicates that the premium on option will rise more when stock prices rises & the premium on option will fall less when the stock price decreases.

Gamma = Change in the Option Delta
Change in the Underlying Price




Vega
  • Vega is the ratio of change in the option price to a unit change in the volatility.

  • Vega indicates how much change in the premium can be anticipated for a unit change in the volatility.

Vega = Change in the Option Premium
Change in the Underlying Volatility




Theta
  • Theta is the ratio of change in the option price to a unit change in the time period.

  • The more the passage of time, the lesser the value of an option.


Theta = Change in the Option Premium
Change in the Time period




Rho

Rho is the ratio of change in the option price to a unit change in the interest rate.


Rho = Change in the Option Premium
Change in the Interest
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