DERIVATIVE SEGMENT – 12

OPTION GREEKS

DELTA: The most important of the Greeks is the option’s delta . this measure the sensitivity of the option value to a given small change in the price of the underlying asset . it may also be seen as the speed with which an option moves with respect to price of the underlying asset . delta = change in option premium/ unit change in price of the underlying asset .
GAMMA : It measures change in delta with respect to change in price of the underlying asset . this is called a second derivative option with regard to price of the underlying asset. It is calculated as the ratio of change in delta for a unit change in market price of the underlying asset . GAMMA = change in an option delta/unit change in price of underlying asset.
THETA : It is measure of an option sensitivity to time decay . theta is the change in option price given a one –day decrease in time to expiration . it is a measure of time decay. Theta is generally used to gain an idea of how rime decay is affecting your option positions. THETA= change in an option premium/ change in time to expiry.

VEGA : This is a measure of the sensitivity of an option price to changes in market volatility . it is the change of an option premium for a given change in the underlying volatility . VEGA= change in an option premium/change in volatility.
RHO : Rho is the change in option price given a one percentage point change in the risk – free interest rate . rho measures the change in an option price per unit increase in the cost of funding the underlying .

RHO = change in an option premium/change in cost of funding the underlying .

Source by

A Gowrish R Bhat