Table of Contents
What are Option Greeks?
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:
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.
“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.
“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.
Live Example to Understand Options Greeks
From Zerodha Option calculator for ATM 35000 for spot price 34857
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 %|
Change in IV
|Call Option||Put Option|
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.