What are Option Greeks and Types of Option Greeks

Futures and options trading has emerged as a lucrative investment choice for many investors who use distinctive strategies to make trades possible and risk minimal. Option Greeks are particular financial metrics that investors find specifically useful in options trading when they wish to evaluate the sensitivity of prices of their option contracts. If you are into options trading or are about to begin your foray into it, this article will arm you with certain measures like options Greeks and effectively make your trades potentially worthwhile. 

What are Option Greeks? 

Futures and options may not be the first choice of investment channels for many investors, but if you are equipped with knowledge about F&O, you have the opportunity to make positive returns on your investment. The realm of futures and options investing has many related methods of trading, not to mention different and unique strategies to apply to make your investment gainful. Given this, option Greeks are just one of the more relevant measures that are used to determine the sensitivity of the price of an options contract to its underlying security or asset. The option Greeks, or simply, the “Greeks” are used to analyse options portfolios and make a thorough sensitivity analysis of any financial portfolio with options. Such measures become crucial for those investors looking to make educated decisions about their positions in potential options contracts.

Objective of Option Greeks 

Investors employ options contracts to hedge financial portfolios and mitigate any potential risk. The motive for these moves is to curb potential negative shifts in other investments. Known to be employed for speculating on such things as whether the price of an asset could increase or drop, options contracts may be successfully used by investors to reduce risk variables. In futures and options trading, investors can either enter a call option or a put option. Just to give you a brief explanation of how this works, the call option gives the holder of an options contract the right (but not the obligation) to buy an underlying security or asset (as specified in the options contract); the put option permits the holder to sell the underlying security or the asset (without any obligation to do so).

Options Greeks Explained 

Simply put, an option Greek is a financial measure or tool to evaluate the sensitivity of the price of an options contract relative to its underlying security or asset, which could be a stock, commodity, or any other asset. The measures of sensitivity are related to volatility or the actual value of the underlying asset and the factors that may affect the price.

Consider this: an options price may be influenced by several factors that may potentially hurt or aid the investor, according to the positions taken by them. You could say that the “Greeks” act as particular measures of risk. They are named after the letters of the Greek alphabet (such as delta options) and each measures different variables such as shifts in implied volatility, time-value decay, and shifts in the price of the underlying security.  

Types of Options Greeks

The different types of Greeks for options contracts are mentioned below and each measures different sensitivity variables related to options contracts:

Option Greek Delta: The option Greek delta (Δ), or delta options, is a measure of the sensitivity of any change in the price of the options contract relative to changes in the underlying asset’s price. For instance, in case there is a change in the value of an underlying asset in an options contract, the options contract price could also change. In other words, if the value of an underlying security increases by ₹100, the price of the options contract is likely to change by Δ amount. The formula is as follows:

Δ  = ∂V/∂S

Where:

∂ is the first derivative
V is the option’s price
S is the value of the underlying asset or security

The delta measure is normally expressed as a decimal. Call options may have a delta that ranges from 0 - 1, and put options can have a delta measure from -1 - 0. The closer the delta of an option is to 1 or -1, the option is deeper in-the-money. 

Gamma Options Greek: Gamma in options, shown by the Greek letter Γ, represents a metric that evaluates the change in delta compared to price changes in the underlying security or asset. For instance, in case the value of the underlying security increases, the options delta must change by the amount of the gamma. The following is the formula to find the gamma in options:

Γ = ∂Δ/∂S = ∂ squared V/∂ squared S

In futures and options trading, long options possess a positive gamma. When an options contract is at-the-money (option strike price=value of the underlying asset), the option will have a maximum gamma. Nonetheless, the gamma declines when the options contract is out-of-the-money.

Option Greek Vega: The option vega (ν) is one of the “Greeks” to measure how sensitive an option price is compared to the underlying security or asset’s level of volatility. In the event of the underlying security’s volatility undergoing a rise by even 1%, the price of the options contract will change according to the vega amount. Here is the formula to calculate the option Greek vega measure:

ν = ∂V/∂σ

Where:

∂ is the first derivative
V is the option’s price
σ is the underlying asset’s volatility

When the vega measure is expressed, it is commonly shown as a monetary amount. A rise in the vega measure typically aligns with an increase in the value of the option (for puts and calls).

Theta Option Greeks: When you want Greek options explained, the theta option Greek should not be overlooked. Theta (θ) is a metric that gives information about the sensitivity of the price of the options contract against the options contract’s maturity period. In case the option’s period of maturity declines by a day, the price of the options contract will also be modified by the amount of theta. The theta option Greek is also commonly called the time decay measure. The following is the formula for the theta measure:

θ = ∂V/∂τ

Where: 
∂ is the first derivative
V is the option’s price
Τ is the option contract’s period to reach maturity

For options contracts, in the majority of cases, the theta is negative. When the options contract is in a position of at-the-money, the theta shows the most negative amount.

Rho Option Greeks: While trading futures and options, rho (ρ) is one of the options Greeks you should understand. This option Greek is responsible for measuring the sensitivity of the option contract’s price against interest rates. In case a benchmark rate of interest rate goes up by 1%, the price of the options contract will change according to the amount of the rho measure. Although considered as the least relevant of the option Greeks as options prices are typically less influenced by fluctuations in rates of interest, this is a measure that investors still consider while evaluating the sensitivity of options contracts. Here is the formula to compute the rho option Greek:

ρ = ∂V/∂r

Where:

∂ is the first derivative
V is the option’s price
r is the rate of interest

Typically, call options in options contracts display a positive rho, and put options show a negative rho.

Conclusion
Futures and options can be a fruitful way to make gains and work as a lucrative investment avenue for many investors. Nonetheless, while engaging in options contracts, while they may work to mitigate your risk and provide a hedge to your financial portfolio, it may be worth your while to step into such contracts with care and apply certain measures like option Greeks to be aware of the positions you are taking.