Option Greeks

06/10/2022 02:30 Option Greeks
Option Greeks – Delta, Gamma, Vega, Theta & Rho
September 22, 2012
3 mins read
While we have done a few posts earlier about option price sensitivities, here is a
quick reference guide for the truly lost and confused. For convenience the reference
guide has been broken down into the following sections:
Greeks Formula Reference

Greeks – Suspects Gallery – a visual review of option Greeks across 4
dimensions and money-ness
Option Greeks in time for your final

exam/interview/assessment/presentation tomorrow morning?
While there are many ways of dissecting Greeks a framework or frame of reference
helps. Here are some basic ground rules.
1. Remember the first order Greeks and separate them from second order
sensitivities. Delta, Theta & Rho are first order (linear) Greeks which means
that they will be different for Call Options and Put Options. Gamma is a
second order (non linear) Greeks which means that its values will be exactly
the same for Calls and Puts. Vega is an interesting variation since its value
remain the same for call and puts but it is a first order estimate.
2. Remember that in most cases Greeks will behave differently depending on the
“money-ness” of the option. Greeks will behave and look differently between
Deep Out, At, Near and Deep In the money options. See deep out of money
options and lottery tickets for an example.
3. Think how the Greeks will change or move as you change the following
parameters:
https://financetrainingcourse.com/education/2012/09/option-greeks-delta-gamma-vega-theta-rho-a-quick-reference-guide/ 1/8
Spot Price
Strike Price
Time to Maturity or expiry
Volatility of the underlying security
Interest Rates
Rather than remember the formula try and remember behavior, shape and shifts. For
example, see the following three panels that show the shift of the 5 Greek shapes
across spot prices and “money-ness”. Starting off with a deep out of money call
option we plot the same curves for an at and near money option as well as a deep in
money option. Can you see the shift and the transition?
Figure 1 Delta, Gamma, Vega, Theta & Rho for a Deep out of money Call Option
Figure 2 Delta, Gamma, Vega, Theta & Rho for At and Near Money Call Option
Figure 3 Delta, Gamma, Vega, Theta & Rho for a Deep In Money Call Option
Option Greeks – Formula Reference
The five derivative pricing and sensitivities (aka Greeks) with their equations
and definition reference. Also see the free Option Greek reference guide
Figure 4 Option Greeks: Delta & Gamma formula reference
Figure 5 Option Greeks – Vega, Theta & Rho, formula reference
Option pricing – Greeks – Sensitivities – Suspects Gallery
Greeks Against Spot Prices. Here is the short series for deep out of money call
option and deep in and out of money put options.
Figure 6 Deep out of money call options – Greeks plot
Figure 7 Deep In money put options – Greeks plot
Figure 8 Deep out of money put option – Greek plot
The way to read the above graphical set is to take one Greek at a time. So starting
with Delta you will see that while the shape is the same, the sign is different between
call and put options. For illustration we have also produced the Greek plot for a deep
out of money put option and while there are some similarities between the deep out
of money call and deep in money put, they disappear completely when we look at
the deep out of money put contract.
Option Price Sensitivities – Plotting Greeks against changing volatility
Figure 9 At money Call option – Greek Plot against changing volatilities
Figure 10 At money put option – Greek plot against changing volatilities
However the difference really crops up between calls and puts when you switch the
frame of reference from changing spot prices to changing volatility. With this new
point of view calls and put are clearly different animals. Why is that? Or is that really
the case? If you look closely you will see that as far as Vega, Delta and Rho are
concerned the basic shape and shift is similar, it looks different because the LHS axis
has shifted. Still Delta is different because of the sign change. But its Gamma and
Theta that are really different when it comes to dissecting the behavior of Greeks
across calls and puts. But would these differences stay if you plot the 5 Greeks across
money-ness?
Option Pricing Sensitivities – Greeks – An alternate dimension
Figure 11 Plotting N(d1), N(d2) and Price against volatility
What do you think is the most common question most students have when they see
figure 11 above? Do you see a contradiction? Need a hint? Take a look at Delta. Then
think about how we calculate Delta for a European call option. We look at N(d1) as a
conditional probability? Intuitively speaking what should we expect N(d1) to do as
volatility rises? Rise or fall? What is N(d1) doing in Figure 11 above?
Now take a look at figure 11 above? What are N(d1) and N(d2) doing as volatility
rises? Is that intuitive or counter intuitive? Need a hint? Two words – volatility drag.
Related Posts
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Understanding Option Greeks - Introducing Gamma
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Business School, Computational Finance, Derivatives, Options Pricing, Treasury
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06/10/2022 02:30 Option Greeks

Option Greeks – Delta, Gamma, Vega, Theta & Rho

September 22, 2012

Greeks Formula Reference

Option Greeks in time for your final

Option Greeks – Formula Reference

Figure 4 Option Greeks: Delta & Gamma formula reference

Figure 5 Option Greeks – Vega, Theta & Rho, formula reference

Option pricing – Greeks – Sensitivities – Suspects Gallery

Figure 6 Deep out of money call options – Greeks plot

Figure 7 Deep In money put options – Greeks plot

Figure 8 Deep out of money put option – Greek plot

Option Price Sensitivities – Plotting Greeks against changing volatility

Figure 9 At money Call option – Greek Plot against changing volatilities

Figure 10 At money put option – Greek plot against changing volatilities

Option Pricing Sensitivities – Greeks – An alternate dimension

Figure 11 Plotting N(d1), N(d2) and Price against volatility

Option Greeks. Using Solver to hedge Vega Gamma exposure

Business School, Computational Finance, Derivatives, Options Pricing, Treasury

Comments are closed.

© 2022 FINANCETRAININGCOURSE.COM | ALL RIGHTS RESERVED.

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