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Practically Understanding Greeks Meaning for Option Value

by CryptoDataDownload

The Setup
We are going to examine the calculator output generated in our fully working option greek calculator of DeriBit transactions to practically explain each of the calculated option greeks. In the below example, the market participant sold one Call contract with a strike price of $28,000 and a maturity date of April 14, 2023 (9 days away as of time of writing). The participant stands to make a profit of $895 (minus commissions) if the Bitcoin (BTC) Index price is less than $28,000 at the time of expiration. The participant received the value ($$) upfront as premium because he sold the option contract.

Delta
Delta can be understood as the change in value of the option per $1 change in the underlying asset (BTC Index). Calculated delta of -0.50 means that for every $1 move higher (lower) in the change of the BTC Index, the option value loses (gains) $0.50c.

Gamma
Gamma indicates the change in the "Delta" per $1 move in the BTC Index; The value of -0.000168 indicates that Delta will further decrease from -0.50 at the rate of gamma (-0.000168) for every $1 change in the BTC Index. As an additional, further example: if hypothetically, the BTC Index fell $100 from its current value; the option's delta will approximately change from -0.50 to -0.5168. Gamma more so refers to the anticipated Delta for each $1 change rather than the change in the option value itself.

Vega
The implied volatility of this option when executed was 0.5399 - The calculated vega value of -17.51 can be understood to mean that if implied volatility increases (decreases) 1% from .5399 to .5499, then the value of the underlying option will decrease (increase) by $17.51.

Theta
Theta is calculated as 54.17; which basically means that for a one day change closer to option maturity, the option value will increase by $54.17. Or you can think of it another way, assuming all other market factors stay the same: the market participant would receive an additional $54.17 in premium upfront (since they sold the option) if the days to maturity increased from 9 to 10.

Rho
No one ever talks about Rho because changes in underlying interest rates are historically less volatile and therefore has less effect on overall option value than the other greeks. For interpretation purposes: the change in the risk free rate from 4.62% to 5.62% (always understood for a 1% change), will decrease the value of the option by $35.75. Rho is generally more important of a consideration for longer term options.

Here is an example results/output from script





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THE PERFORMANCE OF TRADING SYSTEMS IS BASED ON THE USE OF COMPUTERIZED SYSTEM LOGIC. IT IS HYPOTHETICAL. PLEASE NOTE THE FOLLOWING DISCLAIMER. CFTC RULE 4.41: HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. U.S. GOVERNMENT REQUIRED DISCLAIMER: COMMODITY FUTURES TRADING COMMISSION. FUTURES AND OPTIONS TRADING HAS LARGE POTENTIAL REWARDS, BUT ALSO LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THE FUTURES AND OPTIONS MARKETS. DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES OR OPTIONS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS WEBSITE. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
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