All you need to know about options trading on stock is right here, so read on. Whether it is an option premium, open interest or four big greeks, learn in detail about four Greeks: Delta, Theta, Gamma and Vega and their role in options trading.
In options, profit and losses are determined by 3 different sources which means, the direction of the stock, i.e. above or below it; time and volatility can also affect your profit or loss. That means these 3 things have an effect on the price of the option and traders understand these factors better with the help of the Greeks.
What is Delta? Let’s understand this with an example. Suppose Manoj has taken a home loan, if the interest rate on that loan increases, then his EMIs will also increase. If the date is less, then his EMIs should also be less. The role of Delta is similar to the interest rate. This tells us how much the option premium can increase or decrease when the price of the underlying stock rises or falls. Basically, Delta is the option's directional exposure.
Over a period of time, the change in the option price is measured from Greek Theta. This gives the trader an idea that if you hold an option for more than a day, then its value will decrease. Similarly how the expiration date mentioned on the medicines tells us how long the medicine is safe for consumption, the same way the Greek Theta tells us how much potential profit or loss can be made with the passage of time. Another important thing to remember is that, as soon as the expiry of the option contract comes the Theta decreases faster and it works in favour of the options seller.
Gamma helps us find out the speed at which profit or loss is changing. Let’s take an example to understand this: the acceleration metre in the car. As you increase the speed of your car, the acceleration metre reflects the change in the speed. Similarly, Gamma measures the speed of the change in profit and loss. Remember, Gamma is the highest for those contracts that are close to the add-the-money strike.
To understand Vega, let’s first understand implied volatility. Implied volatility (IV) is the volatility implied by the options market. If implied volatility increases, then the price of options will also go up. If the IV decreases, then the price of options will also decrease. The magnitude of this increase or decrease is called Vega. From Vega, one can find out how much the price of options can change if implied volatility changes. If there is an expectation for an underlying volatility to increase, then traders can buy options using Vega. Similarly, option sellers can also take advantage of the decrease in volatility.
Upstox's power-packed option chain provides you with all these 10-plus important and time-sensitive data and insights so that you can make quick decisions without getting confused from one tab to the other. For example, if you want to check all four Greeks of any option, then you just have to go to the option chain section on the Upstox app and you will get the Greeks data of each option. Explore Upstox's option chain today: https://upstox.com/option-chain/