Author: shyam

Vega(κ) is the sensitivity of an option’s value to underlying volatility(σ). σ is one of the main drivers of change in an option’s value and so κ allows you to quantify this particular risk.

For example, a κ of 1178.50 when the model price is Rs.188.92 and σ is 0.185 implies that if σ rises by 1% to 0.195, then the price will increase to Rs.188.92 + 1178.50/100 = Rs.200.705

• κ increases as volatility increases
• κ for a long term option is higher than the κ for a shorter term option with the same strike
• an at-the-money option will have a greater κ than either an in-the-money option or an out-of-the-money option
• κ is the same value for calls and puts

Vega in action: March 2014 NIFTY Options since Jan

First, lets look at the underlying:

To capture the full move of the NIFTY, you’ll have to look at, at least, a dozen strikes between 5950 and 6900.

κ:

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The option’s gamma(γ) is a measure of the rate of change of its delta(δ). δ is dynamic: it changes not only as the underlying stock moves, but as expiration approaches. γ is the Greek that determines the amount of that movement.

• γ is the amount a theoretical δ will change for a corresponding one-point change in the price of the underlying.
• γ will be a number anywhere from 0 to 1.00 and is positive when buying options and negative when selling them.
• Deep-in-the-money or far-out-of-the-money options have lower γ than at-the-money options.
• As implied volatility decreases, γ of at-the-money calls and puts increases.
• When implied volatility goes higher, the γ of both in-the-money and out-of-the-money calls and puts will be decreasing.
• As the time to expiration draws nearer, the γ of at-the-money options increases while the γ of in-the-money and out-of-the-money options decreases.

Gamma in Action: March 2014 NIFTY Options Since Jan

First, lets look at the underlying:

To capture the full move of the NIFTY, you’ll have to look at, at least, a dozen strikes between 5950 and 6900.

γ:

Note that the γ value is the same for calls as for puts. Some intuitions:

1. The δ tells us how many underlying contracts we are long/short.
2. The γ tells us how fast our “effective” underlying position will change.
3. So γ shows how volatile an option is relative to movements in the underlying asset.
4. γ will let you know how large your δ (position risk) changes.

Source:
Option Gamma
Gamma
 

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• Forensics: NIFTY Options – Delta(δ)
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Delta(δ) is a theoretical estimate of how much an option’s premium may change given a 1-point move in the underlying. For an option with a δ of .50, an investor can expect about a 50p move in that option’s premium given a Rs.1 move, up or down, in the underlying.

• For purchased options owned by an investor, δ is between 0 and 1.00 for calls and 0 and -1.00 for puts.
• As a call option goes deeper-in-the-money, δ approaches 1.00 on the increased likelihood the option will be in-the-money at expiration.
• With an increase in implied volatility, δ gravitates toward .50 as more and more strikes are now considered possibilities for winding up in-the-money because of the perceived potential for movement in the underlying.
• Low implied volatility stocks will tend to have higher δ for the in-the-money options and lower δ for out-of-the-money options.
• At expiration an option either has a δ of either 0 or 1.00 with no time premium remaining.
• As expiration nears, in-the-money call δs increase toward 1.00, at-the-money call δs remain around .50 and out-of-the-money call δs fall toward 0 provided other inputs remain constant.

Delta in action: March 2014 NIFTY Options Since Jan

First, lets look at the underlying:

To capture the full move of the NIFTY, you’ll have to look at, at least, a dozen strikes between 5950 and 6900.

δ of calls:

δ of puts:

Note how δs rip towards 0 or 1 as expiry approaches? Here’s an important intuition: in-the-money options will move more than out-of-the-money options, and short-term options will react more than longer-term options to the same price change in the stock.

Source: Understanding Delta

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