Understanding Option Greeks

CA Manish Singh: 
Hello everyone. As I mentioned earlier, even if your view is correct, you may still lose money in options. Similarly, even if your view is slightly wrong, you may still end up making money. This is exactly how options behave. 

If you are an option seller, even if your view goes wrong to a certain extent, you may still gain. If you are an option buyer, your view may be right but only in a very small way, or only partially right, and you may still not make money. 

To understand why this happens, we must understand how option premiums work. The logic behind how option premiums move can only be understood by learning the Option Greeks. Once you understand the Greeks, you understand option trading. Let us start the discussion. 

Exploring Greeks on the Option Strategy Builder 

If you look at the screen, we are in the option strategy builder. We are using the “Create your own strategy” section. Here we have the option chain. 

Earlier, in the previous chapters, we discussed that the Call premium was ₹150 and the Put premium was ₹122 at the same strike. Now, in addition to LTP, we also see the Greeks. 

₹150 is simply the price you see, but that price is the end result of the Greeks. Let us understand the important ones. 

The Greeks shown are: 
• Delta 
• Theta 
• Vega 
• Gamma 
• And another Greek called Rho 

The most important are Delta and Theta. These are the Greeks you must focus on while trading options. 

Understanding Delta 

In simple terms, Delta tells you how much the option premium will change when the underlying index moves. 

Example: 
If an option premium moves from ₹100 to ₹120 when the underlying moves from one level to another, Delta explains this relationship. 

To understand this better, look at the numbers. 
At the 25,450 strike: 
• Call Delta is 0.56 
• Put Delta is 0.45 

Interpretation: 

If Nifty moves 100 points from 25,450, then: 
• The Call premium will increase by 0.56 × 100 which is approximately 56 points 
• If the market goes down by 100 points, the Put premium will increase by 0.45 × 100 which is 45 points 

So Delta tells you how much the option premium changes for a 100-point move in the index. 

Combined Delta 

The combined Delta of a Call and a Put at the same strike is always 1. 
It may temporarily show values like 1.01, 1.02 or even 0.99, but at expiry the combined Delta will always be 1. 

Example: 
At the 25,450 strike: 
• Call Delta: 0.56 
• Put Delta: 0.45 
Their combined Delta is almost 1. 

Another example at 25,500: 
• Call Delta: 0.62 
• Put Delta: 0.39 
Combined value is about 1.01. 
Again, this eventually aligns to 1. 

Delta at In the Money and Out of the Money Strikes 

As you go deeper In the Money: 
• Delta increases 

As you go Out of the Money: 
• Delta decreases 

Example: 
If the market is at 25,450 then: 
• All Call strikes below 25,450 are In the Money 
• All Call strikes above 25,450 are Out of the Money 

Notice how Delta drops as strikes move higher: 
• 25,500 Delta is 0.55 
• 25,600 Delta is 0.44 
• 25,700 Delta is 0.32 
• 25,800 Delta is 0.19 

Meaning, even if Nifty moves 100 points, the 25,800 Call premium will only move about 19 points. 

Using Delta to Set Targets and Stop Loss 

Assume an option buyer purchases an At the Money Call at ₹150. 
If Nifty rises by 60 points, Delta of 0.56 suggests the premium may rise by about 33 or 34 points. 

So the maximum realistic upside is roughly 34 points. 
Therefore, the target should be around ₹180. 

If the target is 34 points, then to maintain a 1:1 risk to reward ratio, the stop loss should be around 17 points. 
So the SL for a ₹150 option should be near ₹130 to ₹133. 

This is how Delta helps you identify meaningful targets and correct stop loss placement. 

Understanding Theta 

Theta represents time decay. It tells you how much premium an option loses simply due to the passage of time. 

At the 25,450 strike: 
• Call Theta is 16 
• Put Theta is 11 

Earlier, the At the Money premiums were: 
• Call: ₹150 
• Put: ₹122 

This data is from Friday end of day. The expiry is on Thursday. 

On Thursday, the At the Money premium on both Call and Put is usually around ₹60. 

This means the premium must decay from 150 to 60 between Saturday and Wednesday. 
That is a 90-point decay over 5 days. 

90 divided by 5 gives an average of 18 points per day. 

But Theta is not linear. 
• When more time is left, decay is slow 
• When expiry is near, decay accelerates 

That is why today the Theta shows 16. 
By Wednesday and Thursday it may show 20 or even more. 

Similarly, Put side data shows an average decay around 12 points per day even though the displayed Theta is 11 today. 

Impact on Option Buyers and Sellers 

If an option buyer holds for a full day without any market movement, they will still lose around 18 points due to time decay. 

Option sellers gain from Theta. 
Option buyers lose from Theta. 

If a buyer trades for just 15 to 30 minutes, they may face only 2 to 3 points of decay. 
This is why option buyers must exit quickly. They should not sit on positions. 

Understanding Vega 

Vega measures volatility. 
It indicates how sensitive an option is to changes in implied volatility. 

Currently, Vega values near 12 indicate the market is not highly volatile. 
If Vega were around 14 or 15, it would mean high volatility and more expensive premiums. 

Understanding Gamma 

Gamma measures how quickly Delta changes. 

Example: 
At 25,450, the Call Delta is 0.56. 
If Nifty moves 100 points to 25,550, the Delta at that level might be around 0.68. 

So instead of gaining only 56 points, the option may gain 60 or 62 points because Delta has increased. 
This extra movement comes from Gamma. 

If the market jumps quickly across levels, Gamma increases rapidly. 
This is known as a Gamma blast. 

Understanding Rho 

Rho measures the sensitivity of option premiums to changes in interest rates. 

If interest rates rise, premiums rise. 
If interest rates fall, premiums fall. 

Summary of Greeks 

• Higher volatility means higher premiums 
• Higher Gamma means faster change in premiums 
• Higher Delta means more movement in the option for each point of underlying movement 
• Higher Theta means higher risk for option buyers 

In the next chapter, we will cover volatility, its meaning and how traders use it in their strategies. 

Disclaimer: Investments in securities markets are subject to market risks. Read all related documents carefully before investing.