INTRODUCTION TO OPTIONS GREEKS
WHY ARE OPTIONS GREEKS SO IMPORTANT? ? OPTIONS ARE TRADED BASED ON PREMIUMS , SO THE PRICE OF THE PREMIUMS PLAYS A VERY IMPORTANT ROLS IN OPTIONS TRADING AS WELL AS FOR THE OTHER MARKET PARTICIPENTS. THESE GEEKS INFULENS THE VALUE OF THE OPTION PREMIUM . SOME MIGHT INCREASE THE VALUE WHILE OTHER DECREASE THE PREMIUM VALUE. LET'S UNDERSTAND THIS CONCEPT WITH AN EXAMPLE: - SUPPOSE THERE IS A CONTAINER CHIP SAILING IN THE OCEAN. THE SPEED OF THE SHIP VARIES ON THE VARIOUS FACTORS SUCH AS - 1) WIND SPEED, 2) WIND DIRECTION, 3) WATER DENSITY, 4) POWER OF SHIP, 5) SEA PRESSURE........ SIMILARLY CONSIDER THE SPPED OF THE SHIP AS THE OPTION PREMIUM. THERE ARE 5 GREEKS THAT INFLUENCE THE OPTIION PREMIUM 1) DELTA (Δ) = AMOUNT OF OPTION PRICE CHANCE FROM 1$ CHANGE IN UNDERLYING 2) THETA (θ) = THE DECAY EFFECT ON THE OPTION PREMIUM 3) GAMMA ( Γ ) = THE RATE OF CHANGE OF DELTA 4) RHO (ö) = PREMIUM SENSITIVITY TO CHANGE IN INTEREST RATE 5)VEGA ( v) =AMOUNT OF OPTI...