Scribd
Upload
9 views18 pages

Greeks

The document discusses key concepts in options trading, including delta, theta, gamma, vega, and rho, which are essential for managing risk in a portfolio. Delta measures the sensitivity of an option's price to changes in the underlying stock price, while theta represents time decay. The document also provides examples and calculations for these metrics to illustrate their application in creating riskless portfolios and maintaining delta neutrality.

Uploaded by

KWESHA SHAH
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
9 views18 pages

Greeks

The document discusses key concepts in options trading, including delta, theta, gamma, vega, and rho, which are essential for managing risk in a portfolio. Delta measures the sensitivity of an option's price to changes in the underlying stock price, while theta represents time decay. The document also provides examples and calculations for these metrics to illustrate their application in creating riskless portfolios and maintaining delta neutrality.

Uploaded by

KWESHA SHAH
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 18

GREEKS

Shailesh Kulkarni
DELTA

The delta of a stock option is the ratio of the change in the price of the
stock option to the change in the price of the underlying stock. It is the
number of units of the stock we should hold for each option shorted in
order to create riskless portfolio.

The delta of call option is positive whereas the delta of put option is
negative
Building riskless Portfolio through
Delta
Consider a portfolio consisting of long position in ∆ shares and a short
position in one call option having strike price of $21. The current stock
price is $20. If the stock moves upto $22, the value of the shares
becomes $22∆ and since the call option has been shorted, the value of
the call option becomes -1. Therefore, the value of the portfolio
becomes $22∆ -1.
Similarly, if the value of the stock goes down to $18, the value of shares
becomes $18∆ and the value of call option becomes 0.
The portfolio is riskless if the value of ∆ is such that the portfolio
remains the same for both alternatives.
Example
• Suppose a financial institution has the following three positions in options on a stock:

• 1. A long position in 100,000 call options with strike price $55 and an expiration date in 3 months. The delta of each option is

0.533.

• 2. A short position in 200,000 call options with strike price $56 and an expiration date in 5 months. The delta of each option is

0.468.

• 3. A short position in 50,000 put options with strike price $56 and an expiration date in 2 months. The delta of each option is

—0.508.

• The delta of the whole portfolio is

• 100,000 x 0.533 - 200,000 x 0.468 + 50,000 x (0.508) = -14,900 This means that the portfolio can he made delta neutral by

buying 14,900 shares.


Delta of Options
Theta
• The Theta of a portfolio of options is the rate of change of the value
of the portfolio with respect to the passage of time with all else
remaining the same. Theta is sometimes referred to as the time decay
of the portfolio.
Example
• Consider a call option on a non-dividend-paying stock where the
stock price is $49, the strike price is $50, the risk-free rate is 5%, the
time to maturity is 20 weeks (= 0.3846 years), and the volatility is
20%. In this case, S0 = 49, K = 50, r = 0.05, σ = 0.2, and T = 0.3846.
9
0.3983

𝑁 ( 𝑑 2 )= 0.4721

𝑆0 𝑁 ′ (𝑑 1)𝜎 −𝑟𝑇 49 ×0.3983 × 0.20 − 0.05 ×0.3846


𝜃 ( 𝐶𝑎𝑙𝑙 ) = −𝑟𝐾 𝑒 𝑁 ( 𝑑 2 )=− − 0.05 ×50 × 𝑒 ×0.4721
2 √𝑇 2 √ 0.3846
-3.1470-1.1578=-4.3048

Therefore, the theta is

Theta is always negative for an option, because as the time passes the option tends to
be less valuable
Characteristics of Theta
1) For at the money options, theta is large and negative
2) As the asset price becomes larger, the theta tends to
Gamma

• The gamma Γ of a portfolio of options on an underlying asset is the rate of


change of the portfolio’s delta with respect to the price of the underlying asset.

• If gamma is small, delta changes slowly and adjustments to keep portfolio delta
neutral are to be made relatively infrequently.

• If gamma is highly negative or highly positive, delta is very sensitive to the price
of the underlying asset and therefore, to keep the portfolio delta neutral
frequent adjustments needs to be made
Calculation of Gamma
𝑆0
( )( )
2
𝑁 ′ ( 𝑑 1) 𝜎
𝐼𝑛 + 𝑟+ ×𝑇
Γ= 𝐾 2
𝑆0 𝜎 √ 𝑇 2
𝑑1=
𝜎 √𝑇
𝑑1
−
2
′ 𝑒
𝑁 ( 𝑥)=
( )(
𝑆0
)
2
√2 𝜋 𝜎
𝐼𝑛 + 𝑟− ×𝑇
𝐾 2
𝑑2 = = 𝑑1 −𝜎 √𝑇
𝜎 √𝑇
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑛𝑒𝑢𝑡𝑟𝑎𝑙 𝐺𝑎𝑚𝑚𝑎=𝑊 𝑇 Γ + Γ

The position to be traded to make portfolio gamma neutral is


Continue with the theta example
• Consider a call option on a non-dividend-paying stock where the stock
price is $49, the strike price is $50, the risk-free rate is 5%, the time to
maturity is 20 weeks (= 0.3846 years), and the volatility is 20%. In this
case, S0 = 49, K = 50, r = 0.05, σ = 0.2, and T = 0.3846.
𝑁 ′ ( 𝑑 1)
Γ=
𝑆0 𝜎 √ 𝑇
0.3983

It means that when the stock price change by ΔS the


0.3983
∴ Γ= =0.0655 delta of the option changes by 0.0655ΔS
49 × 0.20× √ 0.3846
Vega
The Black Scholes Merton model assumes that volatility is constant for
the underlying option. In practice, volatility changes over time.

Where f = Option price; σ= Implied volatility of the option


Characteristics of Vega
1) If Vega is highly positive or negative, the option pricing is highly
sensitive to changes in volatility
2) If Vega is near to zero, change in volatility has little impact on option
pricing.
3) If option is covered by taking a position in the underlying asset,
then its Vega is zero.
4) If all implied volatilities in a portfolio of options are assumed to
change by the same amount during a short duration of time, one
can make the portfolio Vega neutral by
RHO
Rho is the change in the option price with respect to change in interest
rates.
Calculate, Call, Put, Theta, Gamma, Vega and RHO of Call and Put
option

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy