Suppose you have invested some money in the shares of Reliance Industries. This investment decision may be based on your fundamental or technical research… or it may be that you have taken this decision due to some new development, or it may be that you have invested money for a short period of time. Now whatever may be the reason for investing, one thing which is going to be applicable in every case is that your profit and loss will be decided by the price of the stock itself. If the stock goes up, you will profit and if it falls, you will lose.
These 4 Greeks are of great use
Things work differently in option trading. In this type of trading, your profit or loss does not depend only on the price of the stock, but factors like time and volatility also affect it. The good thing is that according to these three factors, you will have profit or loss, you can find out and today we are going to tell you the same. Traders mainly measure these factors with the help of 4 greeks.
Delta: It tells you the amount of increase in the option premium if the price of the underlying stock increases or decreases. Or a reduction can be expected. Understand delta through home loan. If the interest rate on your home loan increases, your EMI will also increase. Similarly, if the rates come down, then your EMI should also come down. In short, delta is the directional performance of your option, i.e. it tells whether the stock will move up or down.
Theta: The value of the option over time Change is measured by the Greek theta. It gives the trader an idea of how much the option would lose in value if held for more than a day. Think of it like the expiry date of medicines. The expiry date written on medicines tells us how long the medicine is beneficial. Similarly, in options, Greek theta takes the guesswork out of trading and tells you about the potential losses and gains over time.
Gamma: The underlying The rate of change of delta with change is measured by Greek Gamma. In simple terms, Gamma measures the speed with which your profit and loss are changing. Understand gamma through accelerometer (the one which is next to your speedometer). Once you increase the speed of your car, your car’s accelerometer measures the rate of change of speed. Gamma is highest for contracts that are close to at-the-money.
Vega: To understand vega, we must first understand implied volatility . Any increase in implied volatility will increase the option value. Conversely, any decrease in the implied volatility will cause the option to be valued. The measure of this increase or decrease is Vega. Thus, vega gives us an idea of how much the option’s price will change based on changes in implied volatility.
Don’t just rely on the Greek
Conclusion: hedge risk effectively In order to manage and deliver better profitability, a good understanding of Greek is essential for traders. It is important to note that Greeks are only one aspect of overall trading. To be successful in options trading, it is necessary to have a good understanding of the market and a good grip on the movements of the market.
Disclaimer – The writer is Director, ApsTalks. The views published are his personal. Before investing in the stock market, take the advice of your financial advisor.
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