Option Greeks

Greek Letters
• Delta
• Gamma
• Theta
• Vega
• Rho
Greek Letters

1.Delta – Measures the rate of change of options premium based on the

directional movement of the underlying
2.Gamma – Rate of change of delta itself
3.Vega – Rate of change of premium based on change in volatility
4.Theta – Measures the impact on premium based on time left for
expiry
5. Rho – Measures the impact on premium based on change in interest
rate
Delta
• Delta (D) is the rate of change of the option price with respect to the
underlying:
=f/S
• For a call option: c=c/S
• For a put option: p=p/S
Measure of Option Sensitivity
• Suppose that the delta of a call option on a stock is 0.6. This mean
that when the stock price changes by a small amount, option price
will change by about 60%.

• Suppose that stock price is Rs.100 and option price is Rs.10. Imagine
an investor who sold call options to buy 2000 shares of stock.(sold 20
call options)

• His position could be hedged by buying 1200 shares. (2000 *0.6)

Measure of Option Sensitivity
• Gain or loss on the stock position would then tend to offset loss or
gain on the option position.
• Let us assume that stock price goes up by Rs. 1, providing a profit of
Rs.1200 . Option premium will go up by Rs.0.6 providing a loss of
Rs.1200.

• Delta of one stock is one so long position on 1200 shares will have
delta of 1200.
• In this case, portfolio delta will be 0. This is delta neutral
Delta
• Delta doesn’t remain constant. Therefore, it has to be rebalanced
• If delta goes up to 0.65, then 100 more shares to be purchased.
• Dynamic hedging, Static hedging (hedge and forget)
• Delta of a call is N(d1)
• Delta of a put N(d1)-1
• If delta is negative, then shares to be bought
Delta
• Absolute value of delta call and delta put is equal to 1
• The delta of at the money option declines linearly over time and
approaches 0.50 at expiration. (For put -0.5)
• The delta of in the money option approaches 1 at expiration. (For put
-1)
• The delta of out the money option approaches 0 at expiration. (For
put 0)
• Your brother-in-law has invested heavily in stocks with a strong Asian
exposure, and he tells you that his portfolio has a positive DELTA. Give
an intuitive explanation of what this means. Suppose the value of the
stocks that your brother-in-law holds increases significantly. Explain
what will happen to the value of your brother-in-law’s portfolio
• DELTA measures the change in the value of an option due to a change in
the price of the underlying asset, which is usually a stock. If an investor
holds a portfolio consisting of a single stock, the DELTA of the portfolio is
one, because a one dollar increase in the stock price will produce a one
dollar per share increase in the value of the portfolio. If the asset in
question is an option, then the DELTA of the option measures the change
in the value of the option contract because of a change in the underlying
stock price. If your brotherin-law’s portfolio has a positive DELTA, the
value of his portfolio will move in the same direction as the value of the
underlying asset. If the value of the stocks he holds increases, then the
value of his portfolio will increase at a rate of DELTA times the dollar
change in the asset price
Delta Neutrality
• In case of strategies, it means combined deltas of the options involved
in a strategy net out to zero.
• It is important to institutional investors who establish large positions
using strangle, straddle and other strategies.
Strangle Delta Neutral
A stock is currently trading at Rs.44. Annual volatility is 15% and risk
free rate is 6%. An option trader decides to create short strangle using
40 put and 50 call. How many put and call should trader use.

Call: N(d1)=0.19
Put: N(d1)-1=-0.11

Ratio is -0.11/0.19 which suggest ratio of 0.58

Delta of a portfolio
• A long position in 100000 call options with strike price Rs.55 and
expiry in 3 months. The delta of each option is 0.533
• A short position in 200000 call options with strike price Rs.56 and
expiration date in 5 months. The delta of each option is 0.468
• A short position in 50000 put options with strike price Rs.56 and date
in 2 months. The delta of each option is -0.508.

• How many shares to be bought for making delta neutral position.

Gamma
• It is the second derivative of the option premium with respect to
stock price
• It is first derivative of delta with respect to stock price
• Gamma of call is equal to gamma of put
• For out the money options, option prices are less sensitive to changes
in stock price
• An option’s delta changes as the stock price changes
Formula for Gamma
Theta
• Theta is a measure of sensitivity of option price to the time remaining
until expiration
• Passage of times hurts option holder and benefits option writer
Delta, Gamma and Theta
Delta Gamma Theta
Long Call + + -
Long Put - + -
Short Call - - +
Short Put + - +
• Consider the following information for a call option written on Mittal’s
stock. S =96 , X =100 , T=5 days , sd =0.4, r=0.1
• DELTA 0.2063, GAMMA 0.0635, THETA 48.7155, VEGA 3.2045, RHO
0.2643. If in two days Mittal’s stock price has increased by Rs. 1 to
Rs.97, explain what you would expect to happen to the price of the
call option.
• Current option price is 0.5
• Two variables are changing in this problem, the underlying stock price, S, and
the time until expiration, T. Thus, one needs to assess the impact of both DELTA
and THETA on the value of the Mittals option. DELTA is 0.2063, and THETA is
48.7155. A one rupee increase in the price of Mittals would be expected to
increase the price of the call option by Rs.2063. However, as an option contract
approaches expiration, the passage of time has a significant adverse effect on
the value of the option. Here two days represent 40 percent of the life of the
option. The THETA effect is equal to Rs..2669 (2/365)*48.7155, which is a larger
negative effect than the positive impact of a stock price increase on the value of
the option. The combined DELTA and THETA effects are Rs.0606 =Rs.2063 –
Rs..2669. Thus, the expected price of the call option is Rs.4394. The price of the
call option according to the Black–Scholes model is Rs .4162.
Vega
• Vega is the first partial derivative of the option price with respect to
the volatility of the asset.
• All long options have positive vegas
• Vega is also called kappa, omega, tau, zeta and sigma prime.
• Higher the volatility, higher is the option price.
• Vega of 0.30 will gain 0.30% in value for each percentage point
increase in the anticipated volatility of the underlying asset.