Which Options Greeks should you know about before Trading Options?

Last Updated: 12-Jul-2021

Short Answer

Options Premiums are primarily made up of two values. Intrinsic Value and Time Value. Whereas the change in the price of the Option premiums is dependent on five factors called Option Greeks. These are Delta, Gamma, Theta, Vega, and Rho. Know more about options greeks and which Greeks should a trader keep an eye on while trading Options.

Detailed Answer

What are Option Greeks?

Option Greeks are the five pillars, based on which the price of the option is decided. These five Options Greeks include Delta, Gamma, Theta, Vega, and Rho.

Just like a water molecule is made up of 2 elements which are Hydrogen and Oxygen. An Options Premium is made up of these 5 elements. The change in the price of the option premium is decided by these factors unanimously.

Now out of these five Greeks, only three contribute the majority of the working of the option. The rest two Vega and Rho depend on some external factors like the Interest rates and sensitivity to high price swings. Let's learn which Option Greeks are the most important for an Options trader in the immediate next part.

The most important Greeks for Options Traders

Out of the five Option Greeks that make up the Option premium, a trader should mainly focus on these three Greeks. These include.

  • Delta
  • Gamma
  • Theta

Let’s look at how these three affect the price of options and why you, as an Options Trader should know about them.

1.Delta

Delta is the key factor that decides how much should the price of an Option should change. This change is with the respect to the respective underlying, Stock, Index, or commodities. The Delta of an option helps a trader to anticipate the price change and the overall Risk/Reward in a particular strike price. For example, if the Delta of an option is 0.2 then if the underlying moves my 50 points then the option premium will change by 10 points.

In this way, a trader can anticipate the overall move of the options and gain on a trade.

2.Gamma

The Second important Options Greeks that you should know is Gamma. Now that you have understood the concept of Delta, Gamma denotes the change of Delta. The delta of an Option keeps on fluctuating as per Gamma. The rate of change in the Delta is denoted as Gamma. For example, if the price of a stock increases by 50 points but the Gamma increases simultaneously, the option price will not increase with the same delta. Which was earlier 0.2. Now the option price will increase by 15 points as the Delta will increase to 0.30. Therefore Gamma is another factor that Options Sellers should keep an eye on as a substantial increase in Gamma can lead to an unusual increase in the Option prices. This might lead to losses for an Option Seller and gain for the buyer of an option.

3. Theta

Now that we know about Delta and Gamma, let's look at the next important Option Greek which is Theta. Theta is like an Ice block that keeps melting with the passage of time. This phenomenon is known as the Theta Decay or time decay. Every Option is made up of two parts. Intrinsic Value and Time Value. The time value is the Theta value of an Option. This keeps on reducing as the expiry of the Option approaches.

The Theta is a friend of an Options Seller and the Enemy of an Options Buyer. As the expiry closes in, the rate of decay increases which leads to more losses to an Option Buyer. Due to this, it is important to choose an Expiry wisely by looking at the Theta Decay for Options Traders.

Conclusion

Options trading is very different from Equity trading where you should just focus on the Underlying. In Options Trading you have to look at the different options greeks and make a view after calculating the Options Greeks. An options trader then has to decide whether to Buy or Sell an Option based on the current market conditions. Hence it is important to know these Greeks before starting options trading.

Tagged With: Options TradingOptions GreeksDeltaGammaThetaVega
Categories: Option Trading
Ask Your Query for FREE, Get quick answers from our FINTRAKK community!
Discussion (0)
Related FAQs
What is Delta Gamma Theta Vega in options?

Option Greeks are the financial indicators. Delta, Gamma, Theta, Vega are the option Greeks and deals with different variables such as price, maturity, volatility.

How much money can you make as an Options Seller?

Option Selling can be considered as a full-time business for traders. Similar to a business, you cannot expect extraordinary returns in options selling. You, as an options seller have an edge over option buyers and the chances of making money are higher. Know how much money can be made by selling Options.

Why is Options Trading more risky on the expiry day?

Options trading involves many factors such as Options Greeks. Options Greeks like Delta, Theta, and Gamma have the most impact on Option prices towards the end of the expiry. The option premiums are impacted highly by Gamma and Delta on the day of expiry. Learn more about Options greeks and how they impact option premiums.

How to become a profitable Options Trader in India?

With the increasing exposure of the stock markets, more and more people are trying a hand in options trading. Options trading have become a lucrative place for individuals to earn money. The reality is certainly different. More than 95% of individuals lose money in Options trading, There are various reasons behind this. Find out the reasons for losses and the steps by which you can be a profitable options trader here.

How does Gamma affects risk in Options trading?

Gamma is an Option Greek that affects the change in the Option premiums. Options traders need to know about Gamma and some other Option greeks to calculate the risk per trade. The effect of Gamma becomes stronger as the expiry approaches. The Gamma also increases as an Option becomes ITM or ATM from OTM. Know more about it here.

Is Quantsapp a good online options analytics platform for option traders?

As more and more people try their hand in Options trading, the demand for good Options trading and analytics platforms is on the rise. There are many online options trading platforms out there. Know if Quantsapp is a good online Options Analytics platform.

Should you start Options Buying with a small capital?

Options Buying requires a lot of skills and effort from the trader. It is not easy to generate profits using Option buying. Many factors work against Options Buying. Let's look at some of the factors and find out if it's a good idea to start Options Buying with small capital.

How much money is required for Options trading?

Options trading involves two aspects. One is options buying and the other is options selling. To buy an ATM option you will require around Rs 10,000 to Rs 25,000 per lot for an Index or stock option. On the other hand, you will require close to Rs 95,000 to Rs 1,50,000 for selling 1 lot of index option. These amounts change with respect to the time remaining to expiry and other market conditions.

What is the Good Delta for Options?

Option delta is a segregation under Option Greeks. Option Greeks are used by option traders to decide what kinds of threats their positions are subject to and how many of them are there.

Is Sensibull free option trading platform?

Sensibull is not a complete free website for option trading but it does offer some free features and also a 7 day free trail. For more details read through the expanded version.