Option Greeks

Abstract

Options Greek is used to determine the sensitivity of options pertaining to volatility, interest rate, price of underlying assets and time decay. There are five types of Option Greek, Delta, Vega, Gamma, Theta and Rho.

Option Greeks refer to the mathematical aspects, which are made use of in the Black Scholes model dealing with pricing of option premiums. These are referred to as Greek options because the symbols used are those of Greek letters. As many as five Option Greeks are known. They are as follows:

Theta Sensitivity of an option pertaining to time decay is measured with theta.

Rho Measures options sensitivity to alterations in interest rates, which are risk free.

Delta Sensitivity of an option to alterations in the price of an underlying asset is measured by Delta.

Gamma Measures the sensitivity of Delta to changes occurring in the price of underlying assets.

Vega Sensitivity of options to changes in the volatility of underlying assets.

Uses of Options Greek:

If an individual is well versed in Option Greek, he may enjoy an edge over the other traders. Options Greek also helps investors to determine and ascertain risks involved in the investment portfolio of a trader thereby allowing him to make the necessary alterations to cut probability of losses and risks. It also helps an individual/trader to hedge options in the investment portfolio of individuals.

A beginner may be immensely benefited from Options Greek especially if he knows about the Option Greek- Delta. It helps him to know the manner in which the value of the option changes with changes in the price of the underlying assets provided the remaining variables are constant.

Parameters in option sensitivity:

As mentioned above, the five different types of Option Greek help in determining the sensitivity of options pertaining to the following parameters. They are given below:

Volatility

Time decay

Price of underlying assets

Interest rate