GREEKS

Dimensions of risk involved in taking a position in an option (or other derivative).

DELTA
It is the change in the value (gain) of derivative with respect to the change in the price of underlying asset sometimes referred to as the "hedge ratio." In other words, price sensitivity. If you buy 1 contract of call option with delta value of 0.7, it means that every option gains approximately $0.70 in value when the underlying stock goes up $1. Since 1 contract represents 100 shares, each contract of those call options gain $70 with a $1 gain in the underlying stock. Similarly, if you buy 1 contract of put option with delta value of -0.7, you make $70 for every $1 drop in the underlying stock. These calculations are only approximations because delta value is changing all the time even while the stock is moving and that options prices are also affected by implied volatility. As an in-the-money call option nears expiration, it will approach a delta of 1.00, and as an in-themoney put option nears expiration, it will approach a delta of -1.00. In short, positive delta value becomes profitable as the stock goes up and negative delta value becomes profitable as the stock goes down.
Type Long Call Option Short Call Option Long Put Option Short Put Option Delta value Positive Negative Negative Positive Profits When... Stock Goes Up Stock Goes Down Stock Goes Down Stock Goes Up

DELTA NEUTRAL
It is a portfolio consisting of positions with offsetting positive and negative deltas so that the position of delta is zero.

DELTA SPREAD
The most commonly discussed delta spread is a calendar spread. The calendar spread involves constructing a delta neutral position using options with different expiration dates. In the simplest example, a trader will simultaneously sell near-month call options and buy call options with a later expiration in proportion to their neutral ratio.

DELTA HEDGING
The strategy of hedging a long position by having a short position is called delta hedging.

THETA
It is the rate of decline in the value of an option due to the passage of time. In other words time sensitivity.

For example, if the strike price of an option is $1,150 and theta is 53.80, then in theory the value of the option will drop $53.80 per day.

GAMMA
It is the rate of change of delta with respect to the underlying asset's price. In a delta-hedge strategy, gamma is sought to be reduced in order to maintain a hedge over a wider price range. If you are an option buyer or seller, high gamma is good as long as your forecast is correct because if it gains it gains more rapidly.

VEGA (KAPPA, LAMBA)

The Vega of a derivative shows how the value of the derivative changes in respect to a one percent change in the implied volatility of the underlying. An increase in implied volatility increases the price (premium) of both call and put options because higher volatility means a greater possibility of option to move into your favor. Vega drops when option gets closer to expiration.
Note: Implied volatility is the estimated volatility of a security's price. In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.

Rho
It is the rate at which the price of a derivative changes relative to a change in the risk-free rate of interest. Rho measures the sensitivity of an option or options portfolio to a change in interest rate. For example, if an option or options portfolio has a rho of 12.124, then for every percentage-point increase in interest rates, the value of the option increases 12.124%. Note:
Risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a

given period of time.

ZOMMA
It is an option Greek used to measure the change in gamma in relation to changes in the volatility of the underlying asset. Zomma, though considered a third level Greek, is a first derivative of volatility, a second degree derivative of an underlying asset. Options traders and risk managers most often use a measure of zomma to determine the effectiveness of a gamma hedged portfolio.

VOMMA
The rate at which the vega of an option will react to volatility in the underlying market. It is the second order derivative of the option value with respect to volatility.

Investors with long options should look for a high, positive value for vomma, while investors with short options should look for a negative one.

ULTIMA
It is the rate at which the vomma of an option will react to volatility in the underlying market. It is the third order derivative of the option value with respect to volatility, or the derivative of vomma with respect to the derivative of volatility.

Option Pricing
Example: If a stock is currently trading at $50, a Call option with a Strike Price of $40 will have a $10 value already built into it as it allows you to buy a $50 stock at $40. Therefore, that option will be priced at $10 + Extrinsic Value. Similarly, if that same stock is currently trading at $50, a Put option with a Strike Price of $60 will have $10 (intrinsic value) value already built into it as it allows you to immediately sell that same stock at $60 the moment you bought it. That option will also be priced at $10 + Extrinsic Value. Such an Option Contract with intrinsic value built into it is known as an In The Money Option (ITM Option). Note: Layman loves to call the price of any option contract it's "Option Premium" but that is actually a
misleading term. As you already know, the price of an option consists of its intrinsic value and premium, not just its premium alone, unless it is an Out Of The Money option where there is no intrinsic value (spot price is greater than strike price). Professionals simply refer to the cost of an option contract at its "Asking Price" when trading or its "Theoretical Value" when calculating using a pricing model. But As such, options premium can mean: The Whole Price of an Option (technically) or Extrinsic Value (in general) of an Option

Dividend Arbitrage
An options trading strategy that involves purchasing put options and an equivalent amount of underlying stock before the ex-dividend date and then exercising the put after collecting the dividend. For example, suppose that stock XXX is trading at $50 and is paying a $2 dividend in one week's time. A put option with expiry three weeks from now and a strike price of $60 is selling for $11. A trader wishing to structure a dividend arbitrage can purchase one contract for $1,100 and 100 shares for $5,000, for a total cost of $6,100. In one week's time, the trader will collect the $200 in dividends and the put option to sell the stock for $6,000. The total earned from the dividend and stock sale is $6,200, for a profit of $100.

NAKED CALL
An options strategy in which an investor writes (sells) call options on the open market without owning the underlying security.

This strategy is sometimes referred to as an "uncovered call" or a "short call"

Historical Volatility vs Implied Volatility

HV is the measure of fluctuation in stock price over past 30 trading days and IV is the expected fluctuation in stock price for next 30 trading days.

Futures Arbitrage - Long the Basis

When the price of the future is overpriced, you can reap that price difference as profit risk free by buying the underlying asset and then going short on its futures contract. This technique is particularly useful in normal markets. This is the same as owning a product and then simultaneously ing into agreement to sell it at a higher price in future. When the futures contract expires, the price of the underlying asset would converge with the futures price, and no matter if the spot price converge upwards towards the futures price or the futures price converge downwards towards the spot price, you will still make that price difference in profit because as future is overpriced there will be some difference in the price of underlying and the future.

Futures Arbitrage - Short the Basis

When the price of the future is underpriced, you can reap that price difference as profit risk free by shorting the underlying asset and then going long on its futures contract. When the futures contract expires, the price of the underlying asset would converge with the futures price, and no matter if the spot price converge downwards towards the futures price or the futures price converge upwards towards the spot price, you will still make that price difference in profit. How to start trading in the derivatives market at NSE First of all You are required to open an account with one of the trading members and complete the related formalities which include signing of member-constituent agreement, Know Your Client (KYC) form and risk disclosure document. The trading member will allot to you a unique client identification number. To begin trading, you must deposit cash and/or other collaterals with your trading member Futures and Options contracts have a maximum of 3-month trading cycle -the near month (one), the next month (two) and the far month (three), except for the Long dated Options contracts. This way, at any point in time, there will be 3 contracts available for trading in the market (for each security) i.e., one near month, one mid month and one far month duration respectively. For example on January 26,2008 there would be three month contracts i.e. Contracts expiring on January 31,2008, February 28, 2008 and March 27, 2008. On expiration date i.e. January 31, 2008, new contracts having maturity of April 24, 2008 would be introduced for trading.

OPTION ARBITRAGE MATRICS Calendar Strike Underlying Month Strike same same Intra Mkt Conversion Box same same same same same different Same Same different different Same Straddle same same same different same

different same same

different same same same same

Option type (call/put) same Exchange same

different same

OPEN INTEREST
The total number of options and/or futures contracts that are not closed or delivered on a particular day.

CIRCUIT LIMIT
That's the highest percentage a stock can go up or down in one day.

Keeping traders updated of the situation is very important