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What is ATM (AT The Money) Options?

ATM are those options having Strike near to Spot Price. Current Price and Underlying is near. Example : NIfty is trading at 16970 Put Option : 17100                    ITM 17000                    ATM 16900                    OTM ATM Option has Delta Value 0.50 why ??? Because Probability of Nifty going up or down from Current Price is 1/2 i.e. 50% Call Option : 17100                     OTM 17000                     ATM 16900                     ITM  For Option video : https://youtu.be/XbwnxRLp7L8 Exercise : Reliance : CMP 2200 Rs PUT Option : 1800 2100 2200 2500 Call Option : 2000 2100 2200 2400 You can Comment here for more updates and Query on any option related Topics.

Greek Letters: Delta, Vega,Theta, Gamma with example


How to hedge portfolio with option is not an easy task, but required some basic knowledge of Greek letter to analyze valuation of option. one can read below basic information on it.....

The Greeks are a collection of statistical values that measure the risk involved in an options contract in relation to certain underlying variables. Popular Greeks include Delta, Vega, Gamma and Theta.

what is Delta?

Delta, the most popular term measures an option's price sensitivity relative to changes in the price of the underlying asset.
It shows the change of 1 point in underlying, relative changes in option price of particular instrument.
Example: stock of SBIN current market price is 280. Call option of  280 strike option Delta is 0.50, option premium is 3 rs. if stock moved to 281 the option premium will increase to 3.5 rs the same way if it goes to 279 then option premium will be 2.5 rs.

so we can say that Delta of option is directly link to option premium. Delta can be 0.0 to 1.0 for call option, While for put option Delta is 0.0 to -1.0.

At the Money option Delta always 0.5 WHY? 0.5 because probably of market is moving up or down is 1/2, either will up or down.

In the Money option Delta above 0.5 & near to 1
Out of  Money option Delta below 0.5 to 00

what is Vega?

Vega measures an option's sensitivity to changes in the volatility of the underlying, and represents the amount that an option's price changes in response to a 1% change in volatility of the underlying market.

Because increased volatility implies that the underlying instrument is more likely to experience extreme values, a rise in volatility will correspondingly increase the value of an option. Conversely, a decrease in volatility will negatively affect the value of the option.
In layman language when uncertainty prevails in the market it is oblivious premium of option will be high. some of the event like election, budget or result of company and such pre decided event or few unseen event like bell out package to any sector or Demonetization such event will create panic in the market, that time volatility will reach at high.

Example:  Normal volatility of SBIN is 35. But due to result it was 45, once result out, it reach to again 35. WHY? because the uncertainly goes out as result matter for some time say 1-2 days, stock can be either 5-10% up or down, but volatility will be reach at normal level once uncertainly goes out.

Being an investor one should keep in mind that huge fall will seen during such time. So buyer of option may witness depreciation in option premium due to such activity clearance.
Recent Example of  PNB case, normal volatility of PNB is 40 but due to big scam it is 110-120 volatility. In a week or 10 days once issue gets clear or some case proceeding happen it will fall back to 60 or below.

What is Gamma?

Gamma measures the sensitivity of Delta in response to price changes in the underlying instrument and indicates how Delta will change relative to each one-point price change in the underlying. Since Delta values change at different rates, Gamma is used to measure and analyze Delta. Gamma is used to determine how stable an option's Delta is.
Gamma is higher for options that are At the Money and lower for options that are in- and out-of-the-money.
IN  Nutshell Gamma shows the stability of particular stock. It measure the Relative change happen in Delta by change in underlying.
Generally Option trader uses more Gamma  for various strategy and making position neutral by Delta buy or sell.

What is Theta?

Theta measures the time decay of an option –option loses every day as time passes, assuming the price and volatility of the underlying remain the same. Theta increases when options are at-the-money, and decreases when options are in- and out-of-the money. Long calls and long puts will usually have negative Theta; short calls and short puts will have positive Theta.

we can say that per day delay in option premium. SBIN 280 call Premium is 2 Rs and Expiry of this month is 22 feb. So in 4 days time value of call is 2 Rs, per day if stock trade near current market price, it will reduce by 0.50 paisa as Out of money option value always Zero at expiry.
Theta is much more important for option seller as it is like per day income by taking unlimited risk. while buyer is having limited cost of per day loss near to maximum option value.

So, buyer is having limited risk while reward is unlimited in case of call option and in put option maximum gain is equal to strike price.

Today we have just discuss few theory concept, will learn practical implication of option how to determine option premium by taking real example of stock.








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