Options Greeks – 4 Major Factors to Price Options
These involve a collection of statistic values which provide the investor an improved holistic view of the performance of a stock – they are expressed as percentages. When it comes to making decision on the possible options strategies excellent to employ, these statistical values are very helpful.
The investor must bear in mind that statistics reflects trends according to past performance. There is no guarantee that the stocks’ movement in the future will perform based on historical numbers. The trends can vary substantially depending on possible new stock performance.
The Beta measures the extent to which the movement of how an individual stock closely tracks the whole stock market movement.
Delta on the other hand, is actually a measure of how option prices relate with underlying stock price. In the case of a Call Option. 50 delta implies half-a-point increase in the premium for each dollar on which the stock rises. The premium goes up at the fall of the stock prices for Put Option contracts. With the approach of the options expiry, the in-the-money contract gets closer to the Delta of 1.
There’s no fixed percentage with the Delta. The Delta value is affected by time to expiration as well as the changes in the price of stock.
Gamma reflects sensitivity of a Delta to change in unit with respect to the underlying. The Gamma shows a complete change in the Delta. As an instance, a 0.150 Gamma change shows that Delta will rise by a mere 0.150 where the underlying price amount rises or falls by 1.0. Note that results could slightly vary as a result of rounding.
The measure of leverage is indicated by the Lambda. It is the anticipated percent change of an option’s value for a one percent change of the underlying product’s value.
Rho shows the sensitivity of the value of option to interest rate change. It shows the complete change in the value of option for an interest rate change of 1 percent.
Two other greeks that determine options’ time value are Vega and Theta.
Category: OPTIONS GREEKS
