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Option Trading: Presented By: Ankit Agarwal MMS - 201

The document discusses option Greeks and delta neutral trading. It defines the five main option Greeks - delta, gamma, vega, theta, and rho - which measure an option's sensitivity to changes in the underlying asset price, volatility, time to expiration, and interest rates. Delta measures price sensitivity, gamma measures delta's sensitivity, vega measures volatility sensitivity, theta measures time decay, and rho measures interest rate sensitivity. The document then explains how delta neutral trading can remove small directional risks and potentially profit from volatility by having a near-zero delta position.

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ankit_85
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214 views

Option Trading: Presented By: Ankit Agarwal MMS - 201

The document discusses option Greeks and delta neutral trading. It defines the five main option Greeks - delta, gamma, vega, theta, and rho - which measure an option's sensitivity to changes in the underlying asset price, volatility, time to expiration, and interest rates. Delta measures price sensitivity, gamma measures delta's sensitivity, vega measures volatility sensitivity, theta measures time decay, and rho measures interest rate sensitivity. The document then explains how delta neutral trading can remove small directional risks and potentially profit from volatility by having a near-zero delta position.

Uploaded by

ankit_85
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Option

Trading Presented By:


Ankit Agarwal
MMS - 201
Options
• Options are derivative instruments, as their fair
price derives from the value of the other asset,
called the underlying.
• Measure the sensitivity of the price of stock
options in relation to 4 different factors:
• Changes in the underlying stock price
• Volatility
• Time decay
• Interest rate
Option Greeks
• The 5 Option Greeks are:
• Delta (Greek Symbol δ)
• Gamma (Greek Symbol γ)
• Vega
• Theta (Greek Symbol θ)
• Rho (Greek Symbol ρ)
Option Greeks - Delta (δ)
• A measure of an option's sensitivity to changes
in the price of the underlying asset
• It approximates the probability that the option
will end up In The Money by expiration
• Factors Affecting Options Delta
• Options Moneyness
• Time to expiration
Option Greeks - Gamma (γ)
• A measure of delta's sensitivity to changes in
the price of the underlying asset
• Important for delta neutral traders.
• As expiration date gets further away, the
gamma value becomes smaller
• Makes stock options with longer expiration
less sensitive to delta changes as the
underlying stock value changes. 
Option Greeks – Vega
• A measure of an option's sensitivity to changes in
the volatility of the underlying asset
• Vega is also the greek that most affect option
prices second to Delta. 
• Vega is most sensitive when the option is at-the-
money and tapers off either side as the market
trades above/below the strike
• As expiration date gets nearer, the vega value
becomes smaller
Option Greeks - Theta (θ)
• A measure of an option's sensitivity to time decay
• The effect of theta value and time decay is active even
when markets are closed
• Theta behaves differently for ITM/ATM options and
OTM options
• ITM/ATM Options Theta
• Further Expiration : Low Theta 
Nearer Expiration : High Theta 
• OTM Options Theta
• Further Expiration : High Theta 
Nearer Expiration : Low Theta 
Option Greeks - Rho (ρ)
• A measure of an option's sensitivity to changes
in the risk free interest rate
• Rho values are usually pretty low and therefore
a percentage increase or decrease in interest
rates don't really make much of a difference to
a stock option.
Delta Neutral Trading (Hedging)
• An option position which is relatively
insensitive to small price movements of the
underlying stock due to having near zero or
zero delta value.
• Delta neutral hedging not only removes small
directional risks but it is also capable of
making a profit on an explosive upside or
downside breakout if a position's gamma
value is kept positive
Delta Neutral Trading (Hedging)
• Delta Neutral Trading - Purpose
• To Make A Profit
• By the bid ask spread of the option - Scalping
• By time delay – Short Straddle
• By Volatility
• By creating volatile option trading strategies –
Long Straddle
• To Protect Position
Delta Neutral Trading (Hedging)
• Delta Neutral Hedging - Step By Step
• Step 1 - Determine the total delta value of your current
position.
• If you are holding 10 contracts of call options with 0.5
delta each, then your total delta value is 0.5 x 1000 = 500
deltas.
• Step 2 - Determine the kind of delta neutral hedge needed.
• If your position is long deltas, then you will need negative
deltas as hedge and if your position is negative deltas,
then you will need long deltas as hedge. 
• Step 3 - Determine the total delta value needed to hedge.
THANK YOU

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