Which are the option Greeks and how do they impact option strategies?

Your question itself is wrong Chandu, I guess you were trying to ask, what are option greeks, you will find the answer here: http://en.wikipedia.org/wiki/Greeks_(finance)

how it will impact on option strategies, doesnā€™t really make any sense. I guess you need to first understand what greeks meean.

Understanding Greeks allows us to trade options with more confidence, especially option writing. I've managed to get some information about option Greeks from the NCFM workbook and edited it for simpler understanding.

TheĀ Greeks
Each Greek letter measures a different dimension to the risk in an option position. These are used by traders who have sold options in the market with anĀ aim to manage theĀ GreeksĀ in order to manage their overall portfolio.

There are fiveĀ GreeksĀ used for hedging portfolios of options with underlying assets (index or individual stocks). These are denoted by delta, theta,Ā gamma, vega and rho.

DeltaĀ of a portfolio is the change in value of the portfolio with respect to a small change in price of the underlying asset. Delta of an option, on the other hand, is the rate of change of the option price with respect to the price of the underlying asset. Let's suppose that the delta of a call option on a stock is 0.5. This means that when the stock price changes by one, the option price changes by about 0.5, or 50% of the change in the stock price. You need to remember thatĀ the delta of a call is always positive and the delta of a put is always negative. As the stock price (underlying) changes, the delta of the option also changes. In orderĀ to maintain delta at the same level, a given number of stocks (underlying asset) need toĀ be bought or sold in the market so I don't think any player is big enough to try and maintain delta at the same level. Maintaining delta at the same level is known as delta neutrality or delta hedging.

GammaĀ is the rate of change of the optionā€™s delta with respect to the price of the underlying asset. In other words, it is the second derivative of the option price with respect to the price of the underlying asset.

ThetaĀ of a portfolio of optionsĀ is the rate of change of the value of the portfolio with respectĀ to the passage of time, with all else remaining the same. Theta is also referred to as the time decay of the portfolio. Theta is the change in the portfolio value when one day passes with all else remaining the same - this is why we can see the value of options reduce even if the market doesn't move at all. We can either measure theta ā€œper calendar dayā€ or ā€œper trading dayā€. To obtain the per calendar day, the formula for Theta must be divided by 365; to obtainĀ Theta per trading day, it must be divided by 220.

TheĀ VegaĀ of a portfolio of derivatives is the rate of change in the value of the portfolio with respect to volatility of the underlying asset. If it is high in absolute terms, the portfolioā€™s value is very sensitive to small changes in volatility. If it is low in absolute terms, volatility changes have relatively little impact on the value of the portfolio. We now have INDIAVIX which helps us ascertain volatility in options very easily.

TheĀ RhoĀ of a portfolio of options is the rate of change of the value of the portfolio with respect to the interest rate. It measures the sensitivity of the value of a portfolio toĀ interest rates.

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I think, of all the option greeks, Theta [time decay] has major impact on option pricing compared to all other option greeks. Impact is more, if the expiry day is in the vicinity. This is the main factors a trader looks at while he is ā€˜writingā€™ out of the money options.

Trading options without an understanding of the Greeks is like flying a plane without the ability to read instruments. Unfortunately, many traders do not know how to read the Greeks when trading. This puts them at risk of a fatal error, much like a pilot would experience flying in bad weather without the benefit of a panel of instruments at his or her disposal. Here you can easily learn about Options Greeks.

Hello @nithin Since we are again talking about option greeksā€¦ Pls lets us know by when can we expect live greeks with option chain in Kite / PIā€¦?? :wink:

Thanks

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is this the workbook you are referring to ā€¦
https://www.nseindia.com/content/ncfm/sm_otsm.pdf

Option Greeks represent the sensitivity of the price of the option to a change in the underlying. Itā€™s important for an option trader to understand how different factors play their role in determining the price of an option contract.
Option Greeks Thumbnail

There are four primary option greeks that play a major role in the price sensitivity of options and they are -

  1. Delta: It measures how fast the option premium is changing based on the underlying moving in a particular direction. So if a call option has a delta of 0.2, you know that the price of the option changes by an average of Rs. 20 when the spot price of the security changes by Rs 100.

Similarly, when your put option has a Delta of -70, you know that the price of the option changes by an average of Rs. -70 when the spot price of the security changes by Rs 100.

  1. Gamma: Gamma measures the rate of change in Delta. In other words, it shows how much Delta changes if the securityā€™s value goes up or down by Rs. 1. Gamma will be a number from 0 to 1.00 on the option chain.

Gamma has the most effect on an options contract when it is near expiration. So, learning about this option Greek will be most helpful if you are an expiry trader.

  1. Theta: It is a measure of how time decay affects the value of an options contract. As time goes by, an options contract will lose value every day due to time decay. This is called ā€œtheta erosion.ā€

Option buyers always have negative theta, which means they lose money bit by bit each day. On the other hand, option sellers have positive theta, so they make money gradually each day. Thatā€™s why option sellers are said to have Theta as their best friend.

  1. Vega: Vega is a measure of an option contractā€™s price sensitivity to a 1% change in implied volatility. Therefore, an increase in implied volatility (IV) usually leads to an increase in the value of the option contract, while decreases in IV typically result in a decrease in value, everything else being equal.

To learn about the Greeks in more detail, head over to the [ā€˜Decoding Option Greeksā€™]
(Decoding Option Greeks: Delta | Theta | Vega | Gamma) blog that I recently published.