The Greeks: Delta, Theta, Vega, Gamma and Rho
Delta: How the price of an option moves in relation to the movement of the underlying.
For an ATM series, delta of 0.5 means a change of 0.5 in the price of the option when the price of the underlying moves by one point.
Gamma: Indicates the change in the delta of an option in relation to the variation in the price of the underlying.
Theta: Measures the expected change in the price of an option when the time to expiration decreases.
Vega: Indicates the change in the price of an option when its volatility varies.
Rho: Indicates the expected change in the price of an option in relation to the variation in the interest rate.
In this table you can find the signs of the Greek sensibilities:
Delta, Theta, Vega, Gamma and Rho.
One of the critical elements when it comes to understanding the Risks inherent in buying and selling options is to be clear about the sign of the Greeks when we buy or sell, when we go long or short.
The management keys of the Greeks are:
Delta:
-
Bullish strategy with positive Delta for Call bought and Put sold.
-
Bearish strategy with negative Delta for Put bought and Call sold.
-
The Delta of the ATM Series is + 0.5 for Calls and - 0.5 for Puts
-
The ITM Series of Calls have delta greater than 0.5 and up to Delta 1
-
The ITM series of the Puts have delta less than -0.5 and up to Delta -1
-
The OTM series of the Calls have delta less than 0.5 and up to 0.
-
The OTM series of the Puts have delta greater than -0.5 and up to 0.
Theta:
-
If we buy options we always have negative Theta and the passage of time harms the position.
-
If we sell options, the Theta is positive and the passage of time benefits the position.
-
Maximum Theta in the ATM series.
Vega:
-
If we buy Options, we buy Vega, strategies helped by the rise in volatility.
-
If we sell Options, we sell Vega, strategies helped by the drop in volatility.
-
Máxima Vega in the ATM series.
-
Vega and Gamma always have the same sign.
Gamma:
This Greek is and has more importance than it seems a priori, it is the variable that speaks of the acceleration of the Delta. Especially in complex strategies, it is a parameter to be considered as key in risk assessment.
-
A negative Gamma can put us in a very compromised and high risk situation.
-
The purchase of Options always has positive Gamma and the way to hedge the gamma risk is to buy Options, Calls or Puts.
-
Gamma and Vega always have the same sign.
-
Maximum Gamma when the series are ATM.
-
The sale of Options always has negative Gamma. If our position falls within the money, a scenario that occurs when the market exceeds the Strike of the Calls sold, the way to cover the risk is to pay a premium by buying Cal
-
If our position enters the money due to a bearish scenario, where the puts we have sold have a strike above the market price, we will be in a risk scenario, and the way to cover this negative gamma risk is by paying a premium buying Puts .
The following table identifies theposition relative in front ofunderlying of the Options
Call and Put.
Understanding the Greeks is taking a leap between a before and an after.
In the Options Club we teach greek!
DISCLAIMER
The entire content of this presentation is for educational purposes only and does not constitute an offer or invitation to invest in, buy or sell any financial asset, stock or investment product.
Trading in derivative products requires qualified knowledge and experience in order to understand the risks associated with them as well as constant vigilance of the position, since these instruments carry a high risk if not properly managed. Derivative products are products that offer leverage, a profit can quickly turn into a loss as a consequence of variations in price and volatility, for this reason you can lose more than the guarantees deposited and the losses can be higher than the total balance deposited in your account.