Option Greeks & Strategies

1. What the Greeks measure

The Greeks are sensitivities: how much an option's price changes when one input changes. They come from pricing models and are estimates that move as the market moves. Learning them turns vague feelings ('the option should rise') into measurable exposures. The main inputs are the underlying price, time to expiry, implied volatility and interest rates.

2. Delta: sensitivity to the price

Delta is the change in option price for a ₹1 change in the underlying. Call deltas run from 0 to 1, and put deltas from −1 to 0. An at-the-money option has delta near 0.5 for calls. Delta also approximates the probability the option expires in the money, which is a useful rough guide.

Example: a call with delta 0.6 gains about ₹60 per unit if the underlying rises ₹100 (0.6 × 100). If the underlying falls ₹100, it loses about ₹60. Delta changes as the price moves, so the estimate is only good for small moves.

3. Gamma: how fast delta changes

Gamma is the rate of change of delta. It is highest for at-the-money options close to expiry. High gamma means small price moves can change your exposure quickly. Option buyers have positive gamma and benefit from large moves. Option sellers have negative gamma and are hurt by large moves, which is why sellers need hedging discipline.

4. Theta: the cost of time

Theta is the daily decline in an option's time value, all else equal. Option buyers pay theta; sellers collect it. Theta is largest for at-the-money options near expiry, which is why short-dated options can lose value quickly even when the underlying does not move.

Example: an option priced at ₹100 with theta −5 per day. After two days, all else equal, it is about ₹90. The decay is not linear; it speeds up near expiry.

5. Vega and implied volatility

Vega is the change in option price for a 1 percentage point change in implied volatility (IV). IV is the volatility implied by the option's price. When uncertainty rises, IV rises and options get more expensive. Before results, budgets and elections, IV often rises. After the event, IV often falls sharply, which is called IV crush.

Example: vega 8, IV rises 2 points: the option gains about ₹16 per unit even if the underlying does not move. If IV then falls 4 points after results, the option can lose value even if the stock moves in the expected direction.

6. Rho: interest rates

Rho measures sensitivity to interest rates. For short-dated options it is usually small and often ignored by beginners. It matters more for long-dated options and in periods of rate changes.

7. Using the Greeks together

No single Greek explains the position. A practical checklist: delta tells you the direction exposure; theta tells you the daily cost or income; vega tells you how exposed you are to a change in uncertainty; gamma tells you how the exposure will change as price moves. Before any trade, write down the Greeks and what would make them change.

8. Defined-risk strategies

A defined-risk strategy limits both maximum loss and maximum profit. Spreads do this by buying one option and selling another. They reduce cost and reduce the impact of volatility changes.

• Bull call spread: buy a lower-strike call and sell a higher-strike call with the same expiry. Profits if the price rises moderately.
• Bear put spread: buy a higher-strike put and sell a lower-strike put. Profits if the price falls moderately.
• Iron condor: sell an out-of-the-money put spread and an out-of-the-money call spread. Profits if the price stays in a range. Limited profit, limited loss.

9. Worked example: bull call spread

Buy a 24,000 call at ₹200 premium and sell a 24,500 call at ₹80 premium. Net debit ₹120. Maximum profit = 500 − 120 = ₹380 per unit. Maximum loss = ₹120 per unit. Break-even = 24,000 + 120 = 24,120. Both risk and reward are fixed before entry. The trade is a view that the index rises to around 24,500 by expiry, with the loss capped if it does not.

10. Volatility as a trade

Some traders trade volatility itself: buying options when IV is low and expected to rise, or selling when IV is high and expected to fall. Compare current IV with its historical range to judge whether options are cheap or expensive. A high IV is not a reason to sell on its own, because high volatility often comes with large moves.

11. Practical cautions

• Model estimates depend on inputs. Check your broker's calculator and understand its assumptions.
• Liquidity matters. Wide bid-ask spreads make Greeks hard to trust and exits expensive.
• Time decay is relentless for buyers. A correct view can still lose money if the move is too slow.
• Expiry week changes gamma and theta sharply. Know your exposure before the final days.
• Paper-trade a strategy before risking money, and keep a record of the Greeks at entry and exit.

12. Common Greeks mistakes

• Buying options only because they look cheap, ignoring theta.
• Ignoring IV when buying before results.
• Selling naked options without understanding gamma risk.
• Assuming delta stays the same as the price moves.
• Using the Greeks without knowing the expiry date and strike.