Options - My way of looking at it

[pratapvb]

Gamma - the rate of change of delta to the underlying

as mention above the delta changes as it becomes more ITM or more OTM

we know that ATM option is 0.5 and as it gets more ITM it moves towards 1 and as it gets more OTM it moves towards 0. Knowing this should be enough for most stuff except things like gamma neutral strategies

 

[pratapvb]

Vega - change in price of otpion with change in volatilty (uncertainity / fear factor)

so as VIX increase / decrease option price increases/decreases even if underlying is not changed. so it possible to have an high option price due to Vega and once uncertanity is gone Vega drops dropping the option prices even if underlying is at same place.

The usually happens around news like budget, election results, etc

So if you take say an OTM NF 6300 call when Vega is high (we can track this with VIX for all practical purposes) and even if NF moves up moderately on news you option may still be lower than what you bought it at as movement was not enough to counter the Vega effect

 

[pratapvb]

Rho - change due to Rate of Interest changes

This is the cost of money factor as you are blocking money to hold an option. For all practical purposes, rate of interest does not change in the short term and can be ignored for trading purposes

 

[pratapvb]

Hope the above ramblings have been useful in Options basics.

OK with this we have a basic understanding of options and now we could get into looking what insturment ITM, ATM, OTM or whether buy/sell is suitable in a particular situation.

 

[manishchan]

Hope the above ramblings have been useful in Options basics.

OK with this we have a basic understanding of options and now we could get into looking what insturment ITM, ATM, OTM or whether buy/sell is suitable in a particular situation.

Great stuff sirji. Pure gem. I don't want to disrupt the flow but just wanted to thank you for this thread. Was curious if the greeks effect show up on the price chart.. I mean from your practical experience, can chart in anyways indicate the effect of time decay, volt etc ? Or statistical calculation is the only way to derive that ?

 

[pratapvb]

Great stuff sirji. Pure gem. I don't want to disrupt the flow but just wanted to thank you for this thread. Was curious if the greeks effect show up on the price chart.. I mean from your practical experience, can chart in anyways indicate the effect of time decay, volt etc ? Or statistical calculation is the only way to derive that ?

I don't know exactly what you mean...but I have not seen them combined with price charts

 

[manishchan]

I don't know exactly what you mean...but I have not seen them combined with price charts

I'm sorry but it will be great if you clarify my 2 doubts before moving ahead. Not sure if I'm jumping the gun here

1. From what I understand, option should be traded based on the spot chart meaning if my spot chart gives a sell, I can buy puts or if spot says buy I can buy calls. In that case one shouldn't look at calls or puts chart to take position because it will have Greeks factor and options chart will not give the right picture (s/r, trendlines etc). Am I right ?

2. This might sound silly but please excuse. Let's say based on my chart I bought 7000 call today @ 1.25. Now lets say nify starts to go down and it never reaches even 6700. So towards end of the month the price of my call goes down to 0.05. Can we identify how much of time decay factor played in to bring the call price down ?

Thanks for your patience with this !!

 

[pratapvb]

I'm sorry but it will be great if you clarify my 2 doubts before moving ahead. Not sure if I'm jumping the gun here

1. From what I understand, option should be traded based on the spot chart meaning if my spot chart gives a sell, I can buy puts or if spot says buy I can buy calls. In that case one shouldn't look at calls or puts chart to take position because it will have Greeks factor and options chart will not give the right picture (s/r, trendlines etc). Am I right ?

2. This might sound silly but please excuse. Let's say based on my chart I bought 7000 call today @ 1.25. Now lets say nify starts to go down and it never reaches even 6700. So towards end of the month the price of my call goes down to 0.05. Can we identify how much of time decay factor played in to bring the call price down ?

Thanks for your patience with this !!

1. I know people who trade options chart. if you assume that you want to get out a prev pvt low and if that pvt low is broken because Vega went down, then why not....but I don't have options chart in my data feed so never looked into it

2. by end of month I would say that most decay is time decay only. comparing VIX at he time you bought and time you sold could give you some idea whether there was a Vega (volatility) component also

 

[muthutrader]

waiting for you are next post ....

 

[pratapvb]

to summarize what we have till now

1. if delta is speed then gamma is acceleration

2. delta of ATM option is 0.5....as it gets more ITM it moves closer to 1 and as it is more OTM it is closer to 0

3. roughly 1/3rd of the premium decays in 1/2 the time left to expiry....which means that in the 2nd 1/2, 2/3rd decays.....so the decay accelerates as we get closer to expiry

4. option prices are influence by changes in volatity....this usually happens amound news events or when there is huge fear factor in the market