InvestorQ : What are option Greeks and how are they calculated? # What are option Greeks and how are they calculated? Answer 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.

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