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What are Options Greeks? how to use them for your favor?
The majority of the time, Options Greeks are turned down owing to their complex mathematical calculations and inability to comprehend them.
Instead of attempting to calculate the values of such Options Greeks, let us attempt to define them and at the very least determine their utility in our daily option trading.
It would be impossible to compute each and every Option Greek of our position unless one were a mathematician.
There is, however, a simple solution because there are various systems available today that assist us with Options Greeks of our overall options positions.
Why should you consider Options Greeks?
Because they provide insight into the various options positions.
It would elucidate the fact that options buy decays with time and option selling is highly risky.
How to use Delta
The delta is the rate at which the price of an option changes in relation to the price of the underlying.
Deltas can be either positive or negative in nature.
Deltas can alternatively be thought of as the likelihood that the option will expire in profit.
For option sellers, having a delta-neutral portfolio might be a wonderful approach to reduce directional risk from market changes.
Example
Consider this number to be a reflection of our position in the underlying.
Positive 0.50 delta indicates that the Options position reflects 50% of the underlying’s purchase exposure, and vice versa.
Nothing needs to be done as long as we have Positive Delta for a positive outlook and vice versa for a negative view.
How to use Theta?
Theta is a measure of how quickly an option’s price changes over time.
Time decay is another term for this.
In purchase option positions, theta values are negative, whereas in sell option positions, theta values are positive.
Example
Theta number is the amount of money we will lose or gain (depending on the negative or positive value) if a day passes and all other things remain constant, such as price.
If Theta is negative and we have a trading break ahead of us, it makes prudent to Sell for a lower price or Call/ Put against the Bought one of the farther strikes.
The negative Theta will be reduced as a result of this.
How to use Vega?
Vega is a Greek statistic that shows how exposed we are to fluctuations in implied volatility (the volatility implied by option premium).
All other things being equal, Vega values represent the change in an option’s price given a 1% change in implied volatility.
The volatility statistic obtained from options premium sold in the market is known as implied volatility.
Higher implied volatility (supposedly) causes higher premiums, and vice versa.
In times of uncertainty, Implied Volatility usually moves dramatically.
Commonly Implied Volatility rises in front of an event that may have unanticipated consequences.
Implied Volatility decreases once the event has gone because the unknown is now known.
Example
In general, we should all look into Vega, especially if we want to hold our option trade through the event.
A recent Implied Volatility measurement a few weeks before the event could provide us with an approximate figure for how low Implied Volatility can go after the event.
As a result, the difference between Implied Volatility before the event and that current number could indicate a decline in Implied Volatility after the incident.
Now, multiplying the Vega value by the anticipated decline in Implied Volatility will tell us what kind of dent in our earnings we may expect if the price does not move, assuming the Vega value of our bets is positive.
If the number of dent is greater than our estimated loss, one could consider winding up ahead of the event or at the very least selling a comparatively cheaper Call/Put against the Call/Put that is purchased.
The Vega value would be reduced automatically as a result of the new Sell option position.
These Greeks would let us comprehend that we are in better control of our pay-offs, and there are sophisticated Option Portfolios that already use this and beyond.