Tag: options

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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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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The most intuitive option greek is theta (θ) – a measurement of the option’s time decay. Theta measures the rate at which options lose their time value, as the expiration date draws nearer. It is usually expressed as a negative number.

Simply put, theta of an option reflects the amount by which the option’s value will decrease every day.

Time and Theta

1. Longer term options have theta of almost 0 as they do not lose value on a daily basis.
2. Theta is higher for shorter term options.
3. Theta is higher for at-the-money options.
4. Theta changes at an exponential rate. It goes up dramatically as options near expiration as time decay is at its greatest during that period.

Theta decay 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.

θ of Calls:

θ of Puts:

Does it mean that you should go out and sell the heck out of every option you can find close to expiry?
 
No! As expiration gets closer, the risk posed by extreme amounts of gamma outweighs the theta you’re collecting.
 
Stay tuned for more.
 

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Charting options is a tough task. The price of the option is probably the last thing that is important. Implied volatility (IV), underlying volatility (σ) and option greeks play a big part in putting on successful option trades. We ran a tool that we developed on ATM Nifty options that tries to capture most of these moving parts.

Observe:

• Theta (θ) declines.
• Vega declines.
• Rho converges to zero.
• Call Delta is, on an average, around 0.54 (std. dev. of 0.075)
• Call IV has been stable and decreasing since January this year: (0.150260, 0.149456, 0.147249, 0.136280)

March 2014 charts

Calls

Puts

Pictures say a thousand words, don’t they? Stay tuned for more.

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