InvestorQ : What are option Greeks and how are they calculated?
Dilmini Mercia made post

What are option Greeks and how are they calculated?

Answer
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Dhwani Mehta answered.
2 years ago


Option Greeks essentially break up the intrinsic value of the call and put option and then study the finer aspects of the price movement. Broadly there are 5 key Greeks that are covered in the table below.

RIL CMP

1110

The current base price of the instrument, e.g., the closing price of Reliance Industries on 26th Nov 2018

Exercise Price

1100

The price at which the underlying instrument will be exchanged. Also called Strike Price

Today's Date

27-11-2018

Expiry Date

27-12-2018

The Date which the contract expires

Historical Volatility

25%

The Historical Volatility of the asset's returns

Risk Free Rate

6.00%

The current risk free interest rate i.e. your return on cash held in the bank

Dividend Yield

0.00%

The Annualized Dividend Growth Rate of the Stock

Call Option

Put Option

Theoretical Price

39.8145

24.4032

Delta

0.5913

-0.4087

The amount that the theoretical price will change if the market moves up/down 1 point

Gamma

0.0049

0.0049

The amount that the Delta will change if the market moves up/down 1 point

Theta

-0.6164

-0.4365

The amount that the theoretical price will change when 1 day passes.

Vega

1.2361

1.2361

The amount that the theoretical price will change if the volatility of the asset moves up/down by 1 percentage point

Rho

0.5067

-0.3929

The amount that the theoretical price will change if interest rates move up/down by 1 percentage point

Call Option

Put Option

Market Price

45.75

28.90

Implied Volatility

29.79%

28.63%

The volatility that is implied by the market prices of the options

Also a word on underpriced and overpriced options. In the above illustration, the market price of the call and the put option is greater than the theoretical price as calculated by the Black & Scholes Model. That means the call and the put options are overpriced. Of course, you will have to consider a lot more factors in this scenario but this is the broad context.