Thread by @Quants_Capital

#Option #Greeks Simplified

#Options are definitely more complicated than equity or futures.

Their prices don’t just go up and down.

They also fluctuate based on things like #time, #implied #volatility and #underlying stock movements.

#Options #Greeks Are Simply Mathematical Shortforms

Most of you would remember from school that mathematical formulas sometimes were #Greek letters like Pi and #Delta. The same is true for options.

Don’t let them overwhelm you or scare you.

They’re simply #mathematical words to explain some very basic principles.

#Greeks Describe the Behavior of #Individual #Options

Each #greek can help predict how it will behave under different circumstances and how options prices would change.

#Greeks explain why #premium #gain or #lose value.

All most all successful traders correctly use one or more of them - even if the trader doesn’t realise it.

The four most important #options #Greeks:
#Delta, #Gamma, #Theta and #Vega.

#Delta: Direction

Delta is the most basic and important of all the #OptionGreeks.

Delta shows how much an option tracks its underlying.
Delta is basically a tracker for your underlying movement or that’s why direction.
Delta is #positive for #calls and #negative for #puts.

If a #nifty #call has a #delta of 0.50, it will increase 0.50 in value when nifty rises by 1 point, if #nifty #put has delta of -0.50, it will increase 0.50 in value when nifty falls by 1 point.

When options are #sold, you simply multiply the #delta by -1.

Therefore, selling puts is #delta-#positive and you make money from the nifty rising.

This is why traders sometimes speak of being “#long #delta” or “#short #delta.”

Also, because options are cheaper than the underlying , #delta is the main source of their #leverage.

#Gamma: Gaining-Delta ( Direction )

But delta can be tricky because it changes when a underlying moves.

That’s why we have #gamma or as we call #gammahulk

#Gamma shows how much #delta an #option #gains or #loses when the underlying fluctuates.

#Gamma shows the absolute or simple change in delta for an option based on the underlying moving by 1 point.

Gamma can be understood as “#leverage on #leverage.” Maximizing it effectively can help minimize capital at #risk.

Confusing let’s say a #call has 0.5 delta and 0.10 gamma.

Say a call has 0.50 delta and 0.10 gamma and underlying rises by 10 point.

The call not only #increases 5 because of its #positive #delta. Along the way higher its delta rises to 0.60,resulting in a gain of more than 5.

When an #trader correctly anticipates an underlying’s #direction, #gamma will #inflate their #delta. That means their #leverage may #increase. Unlike holding shares, their profits won’t be a straight diagonal line up, but a #steepening #slope.

#Vega: #Volatility

#Vega is how much an option changes in value when #impliedvolatility changes on underlying.

Vega is expressed in #decimals of #premium per #percentage points of #impliedvolatility.

#Vega is higher on longer-dated options and lower on shorter-dated options.

say an option has 0.50 vega and the underlying #implied #volatility increases by 1 percentage point. All else being equal, the premium will increase by 0.5.

Remember that implied volatility shows how much the market thinks the underlying will move.

As a result, it tends to increase before #big #events like earnings or #RBIPolic - even if the underlying itself drifts sideways.
Implied volatility can then drop quickly after the news occurs, which is known as a “#volatility #crunch.”

This trend is the basis of many #strangle and #straddle trades or #short volatility trades.

Implied volatility can also rise when underlying falls sharply. That can inflate the value of options after a #selloff,

This also provide the basis for some “short volatility” trades, like #put selling.

In all these cases, #vega is the key number to watch when it comes to implied volatility. Traders wanting exposure to implied volatility may want contracts with more vega.

#Theta: #Time #Decay

Theta is how much time value an option loses each day.

Theta is always a #negative #number because of time decay.
Theta is greater (a bigger negative number) for #shorter-dated contracts.
Theta is expressed in decimals.

Theta works against #long positions and favors #short positions.
Theta increases as #expiration approaches.

A option with -0.1 theta will lose 0.10 of value each day, all else being equal.

#Time #decay is one of the biggest challenges for a lot of traders because it can erase the value of their #options-even when they correctly anticipate the direction underlying is moving.

This is especially true because theta #accelerates closer to #expiration.

Favoring longer-dated #options is a way to avoid this problem.Even though they cost more,there’s more time for a position to play out and move as expected.

Traders looking to #sell options,however, will often select contracts with more theta as they can lose value more quickly.

In conclusion, #Option #Greeks may seem confusing. But understanding them is a huge #benefit to traders.

Delta: “direction”
Gamma: “gaining delta”
Vega: “volatility”
Theta: “time decay”

#OptionsTrading #quantscapital #optiongreeks #derivatives #nse #bse

Thank you so much guys, hope to share as much knowledge as possible 🙏🏻☺️