In option market trading, an option price is influenced by five variables: strike price, spot price, volatility of the underlying assets, the risk-free rate of returns, and expiration time.
Strike price: The price at which an options contract can be bought or sold on or before the expiry.
Spot price: The current market price of a financial security can be bought or sold at a particular time and place.
Volatility of the underlying assets: This relates to the fluctuations in the market price.
Risk-free rate of returns: It is the interest rate an investor can expect or earn on an investment that carries zero risk.
Expiration time: The exact date and time at which the options contract will be rendered null and void.
In this regard, option Greeks are the financial risk measuring metrics used to highlight an option’s sensitivity related to changes in the underlying asset’s price, market volatility, or time to expiration.
Basically, there are five key option Greeks: Delta, Gamma, Vega, Theta, and Rho.
Delta: It is also referred to as a hedge ratio and is used to measure how much the premium of an option will change for a corresponding change in the underlying security’s price. The value of the Delta can vary between -100 and 0 in the case of put options and between 0 and 100 for call options.
Gamma: It highlights an option’s stability as it measures the rate of change of delta for change in the value of the underlying security’s price. Simply put, Delta refers to the change in the price of premium, while Gamma measures the speed of change in Delta.
Theta: It measures the influence of loss of time on the pricing of options. It highlights how much the option loses value with each passing time.
Vega: It highlights how much the price of the option will change vis-a-vis the change in volatility of its underlying asset’s market value. It is useful to highlight the risk-reward profile of a given strategy.
Rho: It measures the change in option price for one-per cent change in interest rates. Generally, when the interest rate surges, call options appreciate in value, while the put options witness a dip. Therefore calls always have a positive Rho, while puts have a negative one.
A few of the other option Greeks include lambda, epsilon, vomma, vera, speed, zomma, color, and time.
Various online tools and platforms are available for those engaged in options trading to calculate and track option Greeks on a real-time basis.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
