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Option Greeks

Category — Derivatives

Option Greeks are the coefficients of option price sensitivity to various factors (price of the underlying asset, time to maturity, etc.). Greek letters (Delta, Vega, Theta, Gamma, Rho) are used for designation of these coefficients, which gave them their corresponding names. The Greeks provide an assessment of option transactions. Below are the names of option Greeks (sensitivity coefficients) and sensitivity factors.

1. Option Delta: reflects the option price sensitivity to the underlying asset price.

2. Option Gamma: reflects the rate of the option Delta change.

3. Option Theta: the option price dependence on the time to expiration.

4. Option Vega: the option price dependence on the volatility of the underlying asset price.

5. Option Rho: the option price sensitivity to interest rates.

Analysis of the Greeks is essential for both instrument trading decisions and risk management.

The most important sensitivity coefficient is Delta. The formula to calculate Delta is the first derivative of the option price relative to the price of the underlying asset.

This coefficient is used in calculations when hedging positions. For example, if the value of the index is 0.4, you must use 4 lots of the underlying asset for every 10 lots of options.

Call Option Delta ranges from 0 to 1, the put option Delta is from -1 to 0. If Delta is equal to 1, a change in the price of the underlying asset leads to a similar change in the option price. Option Delta "in the money" is 0.5 (-0.5 for put options).

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