Greeks Flashcards
What is delta?
It is change in portfolios value due to change in the underlying value
Lets say delta =1
It means portfolio has risk exactly same as the underlying
If market is up 10% => portfolio is up 10%
To hedge delta risk we need x number of underlying
Call(eu)with div = N(d1)e^-qt
Put(eu)with div = [N(d1)-1]^-qt
How you calculate volatility at different intervals?
Annual volatility / sqrt of time
Ie for instance daily volatility =
Annual volatility / sqrt of 260
Because 260 trading days in a year
What are the options risks?
5 individual risks
As time passes and underlying changes all the different risks of option changes simultaneously
So each individual risks are hedged
What is gamma?
Gamma shows the rate of change of delta is diminishing or increasing with respect to price of the underlying
Graph is like normal bell curve stock price is horizontal axis, the peak is at K strike price
What is theta ?
Theta represents time element in the options value. Often called as time decay
As time passes option is worth less.
Ex: think about home insurance
Theta is the rate of the change of a portfolio value with respect to the passage of the time
Graph is mirror of the gamma curve on the bottom of price axis
What is Vega ?
Vega is the rate of change of the value of the derivative with respect to volatility.
Graph is like bell curve with horizontal price axis
Options will have max Vega when stock price=strike price
Implied volatility measures demand and supply of options, vega is sensitivity of portfolio to changes in implied volatility.
If demand is high => implied volatility is high =>
if portfolio has +vega then portfolio will be revalued higher
if portfolio has -vega then portfolio will be revalued lower
Long option position has +vega
What is Rho?
Rho is the rate of change of a derivative with respect to the interest rate
For currency options there are two Rhos
