Option Greeks for Weekly Options - Way to success ?

Table of Contents

What are Option Greeks?

If you trade options, you are probably familiar with the concept of option Greeks.

These are sensitivities scales.

Option Greeks effectively measure the sensitivity of the option price to various parameters that influence the value of an option.

Such sensitivity can be on either the positive or negative side.

When we talk about the option price, we’re referring to the option’s value as calculated by the Black & Scholes model.

What questions we need answer to?

nifty option greek values
option greeks zerodha
greek option trading strategies pdf – Will be provided soon upon request in comments
what is a good delta for options – 0.4 to 0.6
option greeks explained
what is a good theta for options
options greek cheat sheet
what is theta in options

Five Option Greeks and their explanations:

Delta

A measure of the sensitivity of option prices to changes in stock price.

Among the various Greeks used by options traders, this is possibly the most common. Delta is the amount or extent to which the theoretical price of an option changes if the market moves up or down by one point. For call and put options with the same strike, delta is calculated separately. The delta of calls is positive, while the delta of puts is negative. If the delta of a strike is 0.4, a Rs.20 move in the stock price affects the price of a call option positively by Rs.8 and the price of a put option negatively by Rs.8.

Gamma

“A measure of the sensitivity of option prices to changes in Delta.”

This is a second-level derivative, and it is also one of the Greeks that options traders frequently employ. Gamma is the amount or extent to which the option’s DELTA will change if the market moves up or down by one point. Gamma is also calculated independently for call and put options with the same strike. Gamma is a momentum indicator that is actively used by smart options traders to trade in and out of options.

Theta

“Measures the time decay of an option as it approaches expiry.”

Each moment that passes causes some of the option’s time value to “melt away like ice”

This is a popular Greek for option sellers, whose profits are limited to premiums but whose losses are unlimited. Theta is also referred to as a time decay measure or simply time decay.

Theta is a measure of how much the option price changes with each passing day.

Because the value of an option decreases with each passing day, theta is always negative.

Theta only refers to the decay of the time value and not the intrinsic value of the option, which is determined by the price difference between the strike and market prices.

Vega

“The option price’s sensitivity to changes in volatility.”

When you trade options, you are not only looking for price movement, but also volatility movement.

That is because, even if the stock price remains constant, if market volatility rises, so will the value of call and put options.

Vega measures the sensitivity of option prices to changes in volatility.

As a result, Vega is the amount by which the theoretical price changes if the volatility of the asset moves up or down by one percentage point.

Volatility affects both call and put options in the same way.

Volatility increases the value of call and put options, while volatility decreases the value of call and put options.

Rho

“The sensitivity of the option price to interest rate changes.”

This Greek is not as widely used as others such as Delta, Theta, and Vega.

Rho denotes the amount by which the theoretical price changes if interest rates move up or down by one percentage point.

How and why do interest rates affect the value of options?

When interest rates rise, the present value of the excise price falls.

As a result, an increase in interest rates is beneficial to call options but detrimental to put options.

Live Example to Understand Options Greeks

Option Greeks dissect the intrinsic value of a call and put option before delving into the finer points of price movement. Let’s take a look at how the Greeks for the BankNifty option are calculated.

Below option chain today ATM for 34857 spot price for below ATM 34,900 and 35,000

From Zerodha Option calculator for ATM 35000 for spot price 34857

Zerodha Black Scholes Calculator

**Option Greeks Detailed Overview**
BankNifty (35000 Spot)	35000 CE ATM	35000 PE ATM	For ATM Call and Put options below
	Call Option	Put Option	Explanation
Delta	0.465	-0.535	The amount that the theoretical price will change if the market moves up/down 1 point
Gamma	0.0004	0.0004	The amount that the Delta will change if the market moves up/down by 1 point
Theta	-36.177	-29.473	The amount that the theoretical price will change when 1 day passes.
Vega	17.76	17.76	The amount that the theoretical price will change if the volatility of the asset moves up/down by 1 %
IV	22.39	22.39	The amount that the theoretical price will change if interest rates move up/down by 1 %
Option premium Change in IV	Call Option	Put Option
Market Premiums Say for Call	350 premium	461 premium	price of Premiums from Zerodha calculator by IV
Implied Volatility value	22.39%	28.63%	IV Changes the premiums of the options Prices

What to learn from Option Greeks?

It is said that there are two certainties – death and taxes. But when it comes to options there is only one certainty – time decay. Volatility and price cannot be predicted so you need time and distance to make adjustments to your trade. Wide distance between the call and put options helps you keep your losses small even if there is a fast move.

Gap Up and Gap Down are biggest enemies of Option Sellers as 1 Standard Deviation Gap Up and Gap Down can create a huge loss for Option Sellers overnight.

What do you learn from experience?

Naked options are riskier either on Selling side by big moves and Buyer side by Time decay as explained above.

So, What is the answer?

Risk Defined Option strategies are the answer to this.

Instead of just buying a naked Call where time decay is killing the option premium if price movement is not going up, try limited profit Bull Call Spread. Highlights below

This is also called Vertical Spread or Long Call Spread.
Buying a lower priced call and selling a higher priced call. Say Banknifty is at 35000 then buy 35100 Call and sell 35400 Call. Here time decay we have on buy is compensated to some extend on Sell Call OTM which is only Time value of the contract.
Selling the call is to pay for the real call. Unfortunately, the sold call also restricts upside that is limited profits.

Weekdays in deciding the Option Strategies?

Highest decay in Option premiums happen closer to the expiry.

For weekly options

On Start of weekly options say Friday and Monday you can look for buy strategies with limited risk and limited reward using the Option strategies like Bull Call spread etc.. based on market outlook. Or even long iron condor if you anticipate a huge movement on any side. Long straddle and Long straddle can also be used.
On Towards end of Week that is Wednesday and Thursdays, time decay is on your side if you are going for Selling side. That said its better to go with limited risk and limited reward trading strategies like short iron condor, short iron butterfly.
Tuesdays in morning parts can be opted for buying strategies and towards end if needed only Sell side strategies.

Theta decay is less on Friday and Monday are good opportunities to be on buy side like Bull call spreads or Bear Put spreads with limited profit and limited loss. Here the risk is defined.

With time decay aggressive towards weekend its better for Sell side strategies like short iron condor or short iron butterfly to gain from theta decay which can even compensate for any Delta loss due to price movements.

Why do you need Theta on your side?

Think of swimming in waters upstream vs downstream. with theta on your side is like going with the downstream with the flow.

Why work out VIX?

VIX gives us good understanding if VIX is going on higher side or lower side. Option premiums are high priced if IV is high and on other hand cheaper if IV is low.

So what does it say,

in essence Option IV high and you expect it to fall, means you can benefit from quick drop in IV by selling the options.
in essence Option IV low and you expect it to rise, means you can benefit from quick rise in IV by buying the options.

This analysis is purely for educational purposes only. We value you comments and also any points to include for above analysis. Any discrepancies can also be commented.

Option Greeks for Weekly Options – Way to success ?