Options Greeks

(Gamma and Theta)

Puneet Verma (241105) Raj Golani (241109)

Rohit Dhingra (241116) Rohit Gupta (241117)

 Parameters of SENSITIVITY

Delta = (Change of asset price)

Theta = ( Time left for maturity )
Gamma = ( Change of change in price )
Vega = ( Change in volatility )
Rho = ( Change in risk free rate )
 c = SN(d1) Xer(T t)N(d2)
p = Xer(T t)N(-d2) SN(-d1)
Notationally:
c = c(S; X; T-t; r; )
p = p(S; X; T-t; r; )

Where S= Spot Price; N(dn) lies between 0 and 1;

r = risk free rate; t = Time remaining for expiry; t
= Time of contract; = volatility (SD); X =
Exercise Price
What Are Greeks?
The GREEKS are measures of sensitivity. The question is how sensitive a
positions value is to changes in any of the variables that contribute to
the positions market value. These variables are:

S, X, T-t, r and .

Each one of the Greek measures indicates the change in the value of
the position as a result of a small change in the corresponding
variable.

Formally, the Greeks are partial derivatives.

Delta

In mathematical terms DELTA is the first derivative of the options

premium with respect to S. As such, Delta carries the units of the
options price; I.e., Rs. per share.
For a Call: (c) = c/S
For a Put: (p) = p/S
Results:
(p) = (c) - 1
(For the (S) = S/S = 1)
 Theta

Theta measures are given by:

(c) = c/(T-t) (p) = p/(T-t)
s are positive but the they are reported as negative values. The
negative sign only indicates that as time passes, t increases,
time to expiration, T t, diminishes and so does the options
value, ceteris paribus. This loss of value is labeled the options
time decay.
Also, (S) = 0
Gamma

Gamma measures the change in delta when the price of the

underlying asset changes.
Gamma is the second derivative of the options price with respect
to the underlying price.
(c) = (c)/S = 2c/ S2 ; (p) = (p)/S = 2p/ S2

Results: (c) = (p) (S) = 0.

Example
S=100; K = 100; r = 8%; T-t =180 days; = 30%.
Call Put
Premium Rs. 10.3044 Rs.6.4360
The Greeks:
Delta = 0.6151 -0.3849
Theta = -0.03359 -0.01252
Gamma = 0.0181 0.0181
 Theta

Theta measures the sensitivity of the options price to a small

change in the time remaining to expiration:
(c) = c/(T-t) (p) = p/(T-t)
Theta is given in terms is Rs/year.
Let (c) = - Rs 12.2607/year. If time to expiration increases
(decreases) by one year, the call price will increase (decrease) by
Rs. 12.2607. Or, 12.2607/365 = 3.35 paisa per day.
Gamma

Gamma measures the change in delta when the price of the underlying
asset changes.
= 0.0181. (c) = 0.6151; (p) = -0.3849.
Suppose the spot price of a stock is Rs. 100
If the stock price increases to Rs. 101:

(c) increases to 0.6332 (p) increases to -0.3668.

If the stock price decreases to Rs. 99:

(c) decreases to 0.5970 (p) decreases to -0.4030.

Delta-Neutral Positions
A portfolio is Delta-neutral if (portfolio) = 0

EXAMPLE: call - stock portfolio

We just sold 10 CBOE calls whose delta is Rs. 0.54/shares. Each call covers
100 shares.
n(S) = - n(c;S)(c).
(c) = 0.54 and n(c) = -10.
n(c;S) = - 1,000 shares.
n(s) = - [ - 1,000(0.54)] = 540.
The DELTA-neutral position consists of the 10 short calls and 540 long shares.
Hedge Ratio ( c)

Hedge Ratio
The number of shares required to neutralize the portfolio

The number of shares covered by the options

In the example Hedge ratio = 540/1,000 = 0.54. Notice that this is

nothing other than (c)