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Option Greeks are a set of parameters that measure the various risk factors associated with options trading. They are called "Greeks" because they are Greek letters used in mathematical finance to represent these risk factors.Option Greeks due to their heavy mathematical calculations are difficult to comprehend.

Why look at Options Greeks? Well, because they give an insight on the options trading strategies. It would throw light on the fact that to contain the unfavourable underlying price risk, if we have taken any other risk that could ruin our profitability, despite our view going right.

In this article, we will discuss the following Options Greeks and their utility:

1. Delta

2. Theta

3. Vega

4. Gamma

Delta option greeks measures the rate of change of the option's price with respect to the change in the underlying asset's price. In other words, Delta is expressed as a decimal value between 0 and 1 for call options, and -1 to 0 for put options. Deltas can also be thought of as the probability that the option will be in profits upon expiring. Having a delta-neutral portfolio can be a great way to mitigate directional risk from market moves for options sellers.

Delta is an important Greek for option traders as it helps to determine the likelihood of the option expiring in-the-money. Look at this number as a representation of our position in the underlying. Positive 0.50 delta means the Options position represents 50 percent of buy exposure in the underlying and vice-versa.

As long as for a positive view we have Positive Delta and vice-versa nothing needs to be done.

Theta measures the rate of change of the option's price with respect to time. In other words, Theta measures how much the option's price will decrease per day as time passes. Theta is expressed as a negative number, and it increases as the option approaches its expiration date.

Theta is important for option traders to understand because it tells them how much time decay, they can expect in their option positions. Theta is the amount of monremainingill lose or gain (based on the negative of positive value) if a day passes by with all other factors like Price remains the same.

In case Theta is negative and we have a trading break in front of us, it makes sense to Sell cheaper or Call/ Put against the Bought one of the farther strikes. This will reduce the negative Theta and improve our profitability associated with the modifications to option trading strategy.

Vega is the Greek metric that allows us to see our exposure to changes in implied volatility (the volatility implied by option premium). Vega values represent the change in an option’s price given a 1% move in implied volatility, all else equal. Implied Volatility is the volatility figure derived from options premium traded in the market. Higher Implied Volatility means Higher Premiums (apparently) and vice-versa. Typically, Implied Volatility would have a big move in times of uncertainty. Commonly Implied Volatility goes up ahead of an event, which could have any unforeseen outcomes. Once the event is passed Implied Volatility drops down as the unknown is now known.

Generally, Vega should be looked at by all of us especially when we intend to hold our option trade thru the event. A recent reading of Implied Volatility a few weeks before the event could give us a ballpark number to which the Implied Volatility can come down to post the event. So, the difference in Implied Volatility ahead of the event and that recent reading could give us a possible drop in Implied Volatility post the event.

Now Vega value multiplied by the possible fall in the Implied Volatility will let us know that in case if the price does not move, what is the kind of dent in our profitability can come if the Vega value of our positions is positive.

In case such number of the dent is too big than our budgeted loss then one could explore winding up ahead of the event or at least Sell a relatively cheaper Call/Put against Call/Put whichever is bought. This added Sell option position would automatically reduce the Vega value.

Gamma measures the rate of change of Delta with respect to the change in the underlying asset's price. In other words, Gamma measures how much the Delta of an option will change for a 1 point in the underlying asset's price. Gamma is important because it tells us how much the Delta of an option will change as the underlying asset's price moves. This information is important because Delta changes as the underlying asset's price moves, so understanding how Delta will change is critical for option trading strategies formulated by traders.

There are sophisticated Option Portfolios already run utilizing this and beyond, for these options Greeks would help us realize that we are in better control of our pay-offs.

Learn and read more about trend analysis from Quantsapp classroom which has been curated for understanding of dow theory from scratch, to enable option traders grasp the concepts practically and apply them in a data-driven trading approach.

To visualise option greeks and their dynamics, along with option chain, sign up here - https://web.quantsapp.com/signin.

SHUBHAM AGARWAL is a CEO & Head of Research at Quantsapp Pvt. Ltd. He has been into many major kinds of market research and has been a programmer himself in Tens of programming languages. Earlier to the current position, Shubham has served for Motilal Oswal as Head of Quantitative, Technical & Derivatives Research and as a Technical Analyst at JM Financial.

source - moneycontrol.com

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