Thursday, February 17, 2011

Option Greeks - Tools To Measure Price Sensitivity

The price of an Option depends on certain factors like price and volatility of the underlying, time to expiry etc. The option Greeks are the tools that measure the sensitivity of the option price.

They are often used by professional traders for trading and managing the risk of large positions in options and stocks. These Option Greeks are:

Delta: is the option Greek that measures the estimated change in option premium/price for a change in the price of the underlying.

Gamma: measures the estimated change in the Delta of an option for a change in the price of the underlying

Vega : measures estimated change in the option price for a change in the volatility of the underlying.

Theta: measures the estimated change in the option price for a change in the time to option expiry.

Rho: measures the estimated change in the option price for a change in the risk free interest rates.

What is an Option Calculator?

An option calculator is a tool to calculate the price of an Option on the basis of various influencing factors like the price of the underlying and its volatility, time to expiry, risk free interest rate etc.

It also helps the user to understand how a change in any one of the factors or more, will affect the option price.
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