June 2012

Understanding Options Vega : What is it

Options, Vega, Delta, Gamma, Greeks, Basics, Trading Strategies, Volatility, Stock MarketsOptions Vega is the change in the value of an option for a 1-percentage point increase in implied volatility.
 
Vega of a long option position (both calls and puts) is always positive.  At-the-money options have the greatest vega
An option goes in-the-money or out-of-the-money, the smaller is vega. As time passes, option vega decreases
 
Time amplifies the effect of volatility changes. As a result, vega is greater for long-dated options than for short dated options
 
As the above graph indicates, As volatility falls, vega decreases for in-the-money and out-of-the-money options; vega is unchanged for at-the-money options
 
Find Basics of Options Delta Delta ; Gamma.
 
“The greatest ignorance is to reject something you know nothing about”…If you are invested in Markets, it makes sense to be aware of & have an idea about Options

Understanding Options Gamma ~ What is it

Understanding Options Gamma , Delta, Theta, Vega, Options Greeks, Pictures, Finance, Trading Strategies, Basics,
Options Gamma is the Change in an option’s delta for a one-point change in the price of the underlying. It indicates the sensitivity of the Options delta with respect to the underlying. This is important to know because the delta indicates how much/many contracts are long/short based on underlying.
 
The Gamma , on the other hand, indicates, how fast are they ‘effectively’ changing. So by watching the Gamma, the Delta Risk can be effectively managed.
 
Option’s delta changes as the underlying price changes (Refer to the earlier article on Options Delta Basics)
 
Gamma of a long option position (put and call) is always positive
 
Delta increases as the underlying price increases and that delta falls as the underlying price falls
 
At-the-money options have the largest gamma 
 
As volatility falls..,
 – Gamma of at-the-money options increases
 – Gamma of deep in-the-money and out-of-the-money options decreases
 
Basics of Options Delta ; Vega
 
“The greatest ignorance is to reject something you know nothing about”…If you are invested in Markets, it makes sense to be aware of & have an idea about Options

May 2012

Options Delta : The Basics

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Options Delta is the ratio of the change in the price of the stock option to the change in the price of the underlying stock

Delta = instantaneous change in value of asset with respect to an underlying risk factor. Option’s delta changes continuously as underlying risk factor changes

Here are some basic characteristics of Options Delta :

  • It is the change in the price of an option for a one point moves in the underlying
  • Delta of a call option is positive
  • Delta of a put option is negative
  • Delta increases – in decreasing index
  • Delta decreases – in increasing index
  • Call options: 0 < Option Delta < 1
  • Put options: -1 < Option Delta < 0
  • In-the-money options: Delta Option approaches 1 (call:+1,put:-1)
  • At-the-money options: Delta is about 0.5 (call:+0.5, put: -0.5)
  • Out-of-the-money options: Delta Option approaches 0
  • Call Option Delta can be interpreted as the probability that the option will finish in the money
  • An at-the-money option : which has a delta of approximately 0.5, has roughly a 50/50 chance of ending up in-the-money
  • Put Option Delta can be interpreted as -1 times the probability that the option will finish in the money

Impact of Time : As time passes, the delta of In-the-money options: increases & Out-of-the-money options: decreases

Impact of Volatility : As volatility falls, the delta of In-the-money options: increases & Out-of-the-money options: decreases

Hedging using Options – Delta to neutralize market risk :

  • In order to maintain a riskless hedge using an option and the underlying stock, need to adjust holdings in the stock periodically
  • An important parameter in pricing and hedging of options
  • No. of units of stock should hold for each option shorted in order to create a riskless hedge
  • Construction of a riskless hedge is sometimes referred as delta hedging

To get more information on Options Greeks , read Options Basics of Vega ,  Gamma 

“The greatest ignorance is to reject something you know nothing about”…If you are invested in Markets, it makes sense to be aware of & have an idea about Options