What are Options Greeks and how to use them as your trading

Here is a guide by Shubham Agarwal on popularly-monitored Options for Greeks, their utility, and action.
Options Greeks are turned away most of the time due to their heavy mathematical calculations and not being so simple to comprehend. So, instead of trying to derive values of such Options Greeks, let us try to just define them and at least get the applied utilities of them in our everyday option trading.

If we were to calculate each and every Options Greek of our position it would not be possible unless one is a mathematician. However, there is an easy way out as there are numerous platforms available nowadays that help us with Options Greeks of our total options positions.

Why look at Options Greeks? Well, because they give an insight on the options positions. It would throw light on the fact that in an attempt to contain the unfavorable underlying price risk if we have taken any other risk that could ruin our profitability despite our view going right.

Let us understand popularly-monitored Options for Greeks, their utility, and action.

Delta

Delta is the rate of change of the options price with respect to the price of the underlying. Deltas can be positive or negative. Deltas can also be thought of as the probability that the option will be in profits upon expiring. Having a delta-neutral portfolio can be a great way to mitigate directional risk from market moves for options sellers.

Utility

Look at this number as a representation of our position in the underlying. Positive 0.50 delta means the Options position represents 50 percent of buy exposure in the underlying and vice-versa.

Action

As long as for a positive view we have Positive Delta and vice-versa nothing needs to be done.

Theta

Theta measures the rate of change in an options price relative to time. This is also referred to as time decay. Theta values are negative in buy option positions and positive in sell option chain nifty positions.

Utility

Theta number is nothing but the amount of money we will lose or gain (based on the negative of positive value) if a day passes by with all other factors like Price remains the same.

Action

In case Theta is negative and we have a trading break in front of us, it makes sense to Sell cheaper or Call/ Put against the Bought one of the farther strikes. This will reduce the negative Theta.

Vega

Vega is the Greek metric that allows us to see our exposure to changes in implied volatility (the volatility implied by option premium). Vega values represent the change in an option’s price given a 1% move in implied volatility, all else equal.

Implied Volatility is the volatility figure derived from options premium traded in the market. Higher Implied Volatility means Higher Premiums (apparently ) and vice-versa.

Typically, Implied Volatility would have a big move in times of uncertainty. Commonly Implied Volatility goes up ahead of an event, which could have any unforeseen outcomes. Once the event is passed Implied Volatility drops down as the unknown is now known.

Utility

Generally, Vega should be looked at by all of us especially when we intend to hold our option trade thru the event. A recent reading of Implied Volatility a few weeks before the event could give us a ballpark number to which the Implied Volatility can come down to post the event. So, the difference in Implied Volatility ahead of the event and that recent reading could give us a possible drop in Implied Volatility post the event.

Now Vega value multiplied by the possible fall in the Implied Volatility will let us know that in case if the price does not move, what is the kind of dent in our profitability can come if the Vega value of our positions is positive.

Action

In case a such a number of the dent is too big than our budgeted loss then one could explore winding up ahead of the event or at least Sell a relatively cheaper Call/Put against Call/Put whichever is bought. This added Sell option position would automatically reduce the Vega value.

There are sophisticated Option Portfolios already run utilizing this and beyond, for these Greeks would help us realize that we are in better control of our pay-offs.