How to use Option Greeks to make better trading decisions

If you are trading options, then you must have come across the term called Option Greeks. Options Greeks are second level analysis of options which enable a more in-depth analysis of options to take smarter positions in options. The multiple forces which make an options trade successful are collectively called Option Greeks. These forces influence an option contract in real time, affecting the premium to either increase or decrease on a minute-by minute basis. These forces not only influence the premiums directly but also influence each other.

Options Premiums, options Greeks, and the natural demand supply situation of the markets influence each other. Though all these factors work as independent factors, yet they are all intervened with one another. The outcome of this mixture can be assessed in the option’s premium. For an options trader, assessing the variation in premium is most important. One needs to comprehend how these factors play out before setting up an option trade.

Greeks comprise of:

• Delta – Measures the rate of change of options premium based on the directional movement of the underlying

• Gamma – Rate of change of delta itself

• Vega – Rate of change of premium based on change in volatility

• Theta – Measures the impact on premium based on time left for expiry

As and when the value of the spot changes, so does the option premium, more precisely as we already know – the call option premium increases with the increase in the spot value and vice versa. What is the likely value of the 18700 CE premium if Nifty reaches 18745. Well, this is exactly where the ‘Delta of an Option’ comes handy. The Delta measures how an options value changes with respect to the change in the underlying. In simpler terms, the Delta of an option helps us to know by how many points will the option premium change for every 1-point change in the underlying.

Therefore, the Option Greeks ‘Delta’ captures the effect of the directional movement of the market on the Option’s premium.

The delta is a number which varies between 0 and 1 for a call option, and between -1 and 0 for a put option. Thus, calls always have positive delta between 0 and 1, while puts always have negative delta between 0 and -1.

(The author is a homemaker, who dabbles in stock market investments in free time)