Nowadays, Options trading & strategies are popular among traders. The major Volume on National Stock Exchange come from Options segment. The successful Options Trader use their knowledge about Options Pricing and Greeks for making a huge profit. Let’s understand them.

Why understand Options Greeks?

As Options are having a lot of different combinations and pay off, it is required to understand the Option Greeks to play these Options Strategies properly. Greeks describe the change in Options Premium with respect to change in different market variables.

How Option Greeks can reduce the risk in Options Trading:

As we discussed earlier, Option Greeks show the exact change in Option Price with respect to change in different variables. So it becomes very easy for the trader to understand whether Increase in Spot is favourable to him or decrease in the Spot price. Whether a rise in Volatility will make money for him or fall in Volatility and he is going to make money or lose money as the time reaches to maturity.

Greeks show us the degree of risk and return we are taking in Options Strategies. So we can adjust all the Greeks as per our risk-taking ability.

Options Pricing:

There is mainly two popular Options pricing model which we use for calculation of Premium of Options.

1. Black Scholes Pricing Model
2. Binomial Pricing Model

The main variable which is used to calculate the Options Premium is

1. Spot Price
2. Strike Price
3. Volatility
4. Time to Maturity
5. Rate of Interest

Relationship of Variables with Options Pricing:

Relationship of variables with Options pricing shows the impact on Options premium with respect to change in variables. Spot Price is having a positive relationship with Call Option and negative relation with Put Option. Strike Price is having a negative relation with Call Option and positive relation with Put Option. Time is having a negative relation with Call and Put Option. Volatility is having positive relationships with Call and Put Option. Rate of Interest is having positive relationships with Call Option and negative relation with Put Option.

Options Greeks:

As a premium of Options gets affected by many variables, it requires to understand how the price of Option moves. Options Greeks give an exact idea of a fraction of movement in Options Premium. There are mainly five Options Greeks – Delta, Gamma, Vega, Theta and Rho.

Delta: Delta shows you the change in Options Premium with respect to 1 Rupee change in the Spot price of Underlying. Call Delta always remains positive while Put Delta always remains negative.

Gamma: Gamma shows you the change in Options Delta with respect to 1 Rupee change in the Spot price of Underlying. Both Call and Put Gamma always remain positive.

Vega: Vega shows you the change in Options Premium with respect to 1 Percent change in Volatility. Both Call and Put Vega always remain positive.

Theta: Theta shows you the change in Options Premium with respect to 1 Day change in Time. Both Call and Put Theta always remain negative.

Rho: Rho shows you the change in Options Premium with respect to 1 Percent change in Rate of Interest. Call Rho always remains positive while Put Rho always remains negative.

Volga: the Volga shows you the change in Vega with respect to 1% change in Volatility.

Vanna: Vanna shows you the change in Delta with respect to 1% change in Volatility. It also shows you change in Vega with respect to 1 Rupee change in Spot Price.