Option

Trading Presented By:

Ankit Agarwal
MMS - 201
Options
• Options are derivative instruments, as their fair
price derives from the value of the other asset,
called the underlying.
• Measure the sensitivity of the price of stock
options in relation to 4 different factors:
• Changes in the underlying stock price
• Volatility
• Time decay
• Interest rate
Option Greeks
• The 5 Option Greeks are:
• Delta (Greek Symbol δ)
• Gamma (Greek Symbol γ)
• Vega
• Theta (Greek Symbol θ)
• Rho (Greek Symbol ρ)
Option Greeks - Delta (δ)
• A measure of an option's sensitivity to changes
in the price of the underlying asset
• It approximates the probability that the option
will end up In The Money by expiration
• Factors Affecting Options Delta
• Options Moneyness
• Time to expiration
Option Greeks - Gamma (γ)
• A measure of delta's sensitivity to changes in
the price of the underlying asset
• Important for delta neutral traders.
• As expiration date gets further away, the
gamma value becomes smaller
• Makes stock options with longer expiration
less sensitive to delta changes as the
underlying stock value changes. 
Option Greeks – Vega
• A measure of an option's sensitivity to changes in
the volatility of the underlying asset
• Vega is also the greek that most affect option
prices second to Delta. 
• Vega is most sensitive when the option is at-the-
money and tapers off either side as the market
trades above/below the strike
• As expiration date gets nearer, the vega value
becomes smaller
Option Greeks - Theta (θ)
• A measure of an option's sensitivity to time decay
• The effect of theta value and time decay is active even
when markets are closed
• Theta behaves differently for ITM/ATM options and
OTM options
• ITM/ATM Options Theta
• Further Expiration : Low Theta 
Nearer Expiration : High Theta 
• OTM Options Theta
• Further Expiration : High Theta 
Nearer Expiration : Low Theta 
Option Greeks - Rho (ρ)
• A measure of an option's sensitivity to changes
in the risk free interest rate
• Rho values are usually pretty low and therefore
a percentage increase or decrease in interest
rates don't really make much of a difference to
a stock option.
Delta Neutral Trading (Hedging)
• An option position which is relatively
insensitive to small price movements of the
underlying stock due to having near zero or
zero delta value.
• Delta neutral hedging not only removes small
directional risks but it is also capable of
making a profit on an explosive upside or
downside breakout if a position's gamma
value is kept positive
Delta Neutral Trading (Hedging)
• Delta Neutral Trading - Purpose
• To Make A Profit
• By the bid ask spread of the option - Scalping
• By time delay – Short Straddle
• By Volatility
• By creating volatile option trading strategies –
Long Straddle
• To Protect Position
Delta Neutral Trading (Hedging)
• Delta Neutral Hedging - Step By Step
• Step 1 - Determine the total delta value of your current
position.
• If you are holding 10 contracts of call options with 0.5
delta each, then your total delta value is 0.5 x 1000 = 500
deltas.
• Step 2 - Determine the kind of delta neutral hedge needed.
• If your position is long deltas, then you will need negative
deltas as hedge and if your position is negative deltas,
then you will need long deltas as hedge. 
• Step 3 - Determine the total delta value needed to hedge.
THANK YOU