GREEKS IN OPTIONS TRADING

In the above image, you can see the Greeks and Implied Volatility. Vega, Theta, Gamma, Delta are the major Greeks available on the LTP Calculator Option Chain.

• Vega: It describes the volatility of a particular strike price. Vega indicates how much the option’s price will change for a 1% change in implied volatility.

• Theta: Commonly referred to as the time value of the premium (LTP). It is the rate at which the premium (Last Traded Price) decreases/depreciates as time passes. Assuming there is no movement in the market price, in other words, if the opening and closing market prices are the same (in a day) and other factors remained stable, the option’s price will decrease by an amount equal to Theta (at the end of the day). 

• Delta: Delta represents the probability of the LTP to not become zero at the end of expiry. If the delta is 0.7864, simply multiply it by 100% to get 78.64%. This 78.64% represents the probability that the LTP of a particular strike price will not become 0 on the day of expiry. 

• Delta also describes the rate of change in the LTP with one-point movement in the underlying asset’s price. Delta varies by strike price, meaning each strike has its own delta. As you move further in-the-money (ITM), Delta increases, and it decreases as you move out-of-the-money (OTM). In other words, higher LTP has higher Delta and lower LTP has lower Delta.

• Option buyers should always prefer a higher delta. A delta above 0.6 is best for option buyers. Always remember, the LTP of any strike price consists of both Time Value and Intrinsic Value. Delta will increase the LTP, while Theta will decrease the time value. If you choose a strike price with a higher delta, it automatically means you are choosing a strike price with a lower Theta. Both are inversely proportional. This will maximize your profit and probability of making profit.

• Gamma: Gamma measures the rate of change in Delta with one-point movement in the underlying asset’s price. Essentially, it shows how much Delta will change as the market moves by 1 point. You can say, Gamma is delta of Delta.

• Implied Volatility (IV): All the major and minor Greeks together makes the Implied Volatility. IV directly affects the extrinsic value of the LTP. Higher IV means the higher time value, while a lower IV means the lower time value. Planned news events tend to increase IV, while unexpected news can decrease it. Higher IV indicates that news is floating in the market.