Stock Market Basics to Advance - Lecture 14 ( Option Greeks)
There are various Greeks in option buying,
will see one by one
1. Delta
- The first Greek is delta, which measures how much an option price is expected to change per Rs 1 change in the price of the underlying security or Index.
- For eg, A delta of 0.40 means that the option price will theoretically move Rs 0.40 for every Rs 1 move in price of underlying stock or index.
- Rate of change in option premium.
- Call value depend on delta
- Range between 0 to 1 or 100
OTM ATM ITM
- Always buy ATM levels which are safe.
2. Theta
- Theta measures the rate at which the option premium decline due to time decay.
- Theta options are defined as an option greek that measures the rate at which the option loses its time value as the expiration date draws near.
- On Wednesday, Thursday do option buying very carefully because there is very fast decay on premium as expiry approaches very closer.
- Example
From following fig, we understand how it
will work. Y axis represents Option Value and X axis represents time.
Suppose
I bought an option of 3 months expiry. Suppose option premium value is 500 then
if
Case 1. First 30 days having slightly change in option premium value, then it may reduce to 480 till 30th day.
Case 2. Then next 30 days having slightly greater decay in option premium value. Premium may fall from 480 to 420.
Case 3. Then next 30 days rate of premium
decay increases very fast. It may reduce from 420 to 300.
Case 4. Now decay in premium is rapid, so option buyer has to be very quick because if he hold it for longer time then he may face losses even after market is in same position. Now premium reduces from 300 to 0.
Eg 2 . Suppose Currently Nifty 50 spot price is 21000.
There are 2 friends Ram and Shyam who wants to trade in it. Ram thinks market will move up and shyam thinks market will move down. Let’s assume Ram buys call of 21000 whose premium price is 80 and shyam buys put of 21000 whose strike price is also 80.
Assume that market moves up from 21000 to 21050 in a period of 2 hrs. Whose theta value is -5, Rams analysis is right.
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