Option Greeks is the fundamentals of stock market that professional players such as foreign investors, Pro, Domestic Investors and Retail Traders likes to invest and earn high profit in limited time. However, the option trading contains high risk-reward ratio. The option buyers mostly loose its money as the big market players controls the market direction in which small trade fails to deal with.
The concept of Option Greeks would help to gain better sense of direction to any beginner or option trader to invest and earn profit. The Option Greeks is determined on the basis of changes in option prices, volatility, time decay and other factors. There are different Stock Greeks available though we will study major Greeks such as Delta, Gamma, Theta, Vega and RHO.
- Option Greeks Charts helps to identify the expected price of option by inserting volatility, time value, market price and spot price.
- It helps to make better decision and found market trends with option chain calculator.
- Delta, Theta, Gamma, and Vega ensures to measure the expected value of prices will go down or up as per the put and call option.
The Delta is defined as the change in the price of option premium when the underlying assets of stock or index changes by 1 Unit. For example, if the New York Stock Exchange goes up by 100 points, there is high chance of getting maximum profit with In the Money (ITM) option compared to the Delta of Out of the Money (OTM) options.
Even though prices of OTM are lower than ATM premium, the chances of reaching the marketing up to that level is very low. Hence, is always suggested to trade or choose the strike prices with in the range of ATM options.
It will help to reduce potential risk and gain high profit. For example, if the Delta in call option is 0.5 and the market goes up by 200 points, the call price premium will be increase by 100 points due the relationship with DELTA and Market price.
The effect of GAMMA can be seen more in the market during the sudden or uncertain news in the market. The uncertain newly creates additional volatility in the market that creates extra pressure or boost in the market prices that does not show uniformity as it was considered in the last example of Gamma.
If the market price of option index increased by 200 points, the Gamma effect will create extra shot up due to the news or events that might increased the call option prices up to 60 or 70 as well and vice a versa. Hence, many professional traders such as option sellers avoids to trade on expiry as sitting into the wrong directional trend could double the losses. However, it is good for option buyers if you have pick right trend.
Vega indicates a volatility index which is not static and change its dimension from upward to downward movement. It is also known as expected movement over a period of next one day, month or year.
For example, During the Covid-19 several stock market indexes faced crisis during its peak. Hence, the market was expected to make big move and the premium was 8% to 10%. However, in the current situation the market is not expected dynamic changes due to sustainability.
The premium prices are at 3% to 4% in the option chain. If you are an option buyer, it is advised to trade if the volatility is low and premium is going up. However, if the option premium is decreasing and the volatility index is high, it is beneficial for option sellers.
It defined as the rate of decrease in the value of premium option due to time decay. Theta can help you to identify the probability of the option price would go up or down as per the current market situation. For example, if the market is trading at 15,800, the probability of market going up for 16100 will be high than 16200.
Hence, the prices of option would be differing as per the time value. The higher the time value, the higher premium prices you would need to pay. As you would see, in the weekly or monthly expiry of option chain, the prices of premium will decrease as the time value reduced.
For example, if the option price for beginning of the expiry would be 430, as the time decay occurs till the end expiry the prices of option would be 80. If you’re are a directional trader, it becomes crucial for you to avoid buying spot price which is nearer the next expiry or on expiry.
The Theta never favours the option buyers as the time value always gets over. Hence, option sellers are always profitable compared with option buyers.
|Option Buyer||Option Seller|
The last Option Greek is not that important, though it is useful to understand for academic purpose. The RHO is nothing but change in the option price due to the effect of interest rate. For example, if the interest rates in America is 3% for deposits while, the other international banks are offering 6% interest rates on Fixed deposits annually.
Hence, it can be said that You will deposit your money where you get more profit. If the interest rates are high, the option prices of the indices will be high and vice a versa. However, the economic interest rates would remain static annually, hence the importance of RHO becomes low as it does not show much changes on daily basis.
The options calculator is available on your broker services or other websites such as Investing.com and Money control that provides free access to use future and foreign calculators. The discussion was surpassed with respect to option buyers to provide easy explanation on how as beginner you can find the right trend with Option Greeks’ tool. Find stock market courses to get greater level of knowledge if you’re beginner.