Option premiums do not move randomly; they respond precisely to changes in the underlying asset's price, time remaining until expiration, and market volatility. Option Greeks are mathematical measurements derived from option pricing models (such as Black-Scholes) that quantify these price sensitivities.
1. Delta (Δ)
Delta measures the expected change in an option's premium for a ₹1 change in the underlying asset price.
- Call Option Delta: Ranges from 0 to +1.0 (ATM calls typically have a Delta near +0.50).
- Put Option Delta: Ranges from 0 to -1.0 (ATM puts typically have a Delta near -0.50).
2. Gamma (Γ)
Gamma measures the rate of change of Delta for a ₹1 move in the underlying asset. Gamma is highest for At-The-Money (ATM) options nearing expiration.
3. Theta (Θ) - Time Decay
Theta measures the daily rate of time decay of an option's premium, assuming all other variables remain constant. Option buyers lose Theta daily, while option writers benefit from Theta decay.
4. Vega (ν) - Volatility Sensitivity
Vega measures the change in option premium for a 1% change in Implied Volatility (IV). Higher IV inflates option premiums, while a collapse in IV (volatility crush) reduces premiums.
5. Rho (ρ)
Rho measures an option's sensitivity to changes in risk-free interest rates.
Educational Summary: Option Greeks allow market participants to quantify exactly how price action, time decay, and volatility impact contract pricing.
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