Introduction

The price of the option does not always appear to move in tandem with the price of the underlying asset. A variety of market factors can influence the price of an option. Traders use pricing models to compute the Greeks and ascertain the impact of each factor as its value changes. Greeks, including Delta, Gamma, Theta, Vega, and Rho, measure the different factors that affect the price of an option contract.

Streak Provides an indicator that automatically calculates all the Greeks and the implied volatility for all the available option contracts. In this article, we will discuss how the indicator works and how it can be used to create strategies and scanners.

The Option Greeks Indicator 

Option Greeks Indicator
Image 1: Option Greeks Indicator

With this indicator, you will be able to use all the option Greeks and implied volatility data in your strategy and scanners. It is comparable to a Black & Scholes Options calculator. The schematic diagram of this indicator has been shown below : 

Schematic Diagram of the Option Greeks indicator
Image 2: Schematic Diagram of the Option Greeks indicator

Amongst the inputs, most of the inputs are fed automatically as per the options contract that you have selected to create the strategy. You will only need to enter the interest rate and dividend if any. 

Inputs to the Option Greeks Indicator

Interest Rate – This is the current risk-free interest rate. Use the RBI 91 day Treasury bill rate for this purpose. You can access the rate from the RBI website: https://www.rbi.org.in

Dividend – This is the expected dividend per share if the stock goes ex-dividend within the expiry period. For instance, suppose today is May 7 and you want to calculate the option Greeks for the Tata Motors option contract. Assume Tata Motors goes ex-dividend on May 18 and pays a dividend of Rs. 7. The May series expires on May 28. In this case, you must provide an input of Rs. 7.

Let’s have a look at some examples on Streak: 

Strategy Entry Condition Example:

This is an entry condition that will get triggered if the current IV shoots above the highest IV in the last 5 candles.

Image 3 : Strategy condition Example
Image 3: Strategy condition Example

Scanner Example:

This scanner will scan the Nifty Current Month Expiry contracts with Delta between 0.45 and 0.55.

Image 4: Scanner Example
Image 4: Scanner Example

A quick summary of the Option Greeks:

Delta: 

Delta determines the change in options price for a unit change in the price of the underlying. Simply put, if the price of the underlying changes by 1 rupee, the price of the option will change by ‘Delta’ amount. The value of Delta is always between 0 to 1 for Calls and -1 to 0 for Puts. Some traders also use the -100 to 100 scale.

Delta Example: 

Table 1 : Example showing Impact of Delta
Table 1: Example showing Impact of Delta

Gamma: 

Gamma determines the change in the delta value for a unit change in price of the underlying. Simply put, if the price of the underlying changes by 1 rupee, the ‘Delta’ of the option will change by ‘Gamma’ amount. If Delta is comparable to speed of options price, then Gamma is acceleration. Unlike Delta, Gamma is a positive value for both, Calls and Puts. The value of Gamma is highest for ATM strikes.

Gamma Example:

Table 2 : Example showing Impact of Gamma
Table 2: Example showing Impact of Gamma

Theta:

Theta determines the change in options price for 1 day change in time to maturity. Options lose value as they get closer to maturity. If the expiry gets closer by 1 day, the option price will change by ‘Theta’ amount. The effect of theta gets higher as we approach the expiry. 

Theta Example:

Table 3 : Example showing Impact of Theta
Table 3: Example showing Impact of Theta

Vega: 

Vega determines the change in options price for 1% change in the volatility of the underlying. If the volatility of the underlying changes by 1%, the price of the option will change by ‘Vega’ amount.

Vega Example: 

Table 4 : Example showing Impact of Vega
Table 4: Example showing Impact of Vega

Rho:

Rho determines the change in options price for a percentage change in the risk-free interest rate. If the risk-free interest rate changes by 1%, the option price will change by the rho amount. The value of an option is less sensitive to changes in the risk-free interest rate than to changes in other parameters. The value of Rho is positive for Call Options and negative for Put Options.

Rho Example:

Table 4: Example showing Impact of Vega
Table 4: Example showing Impact of Vega

Conclusion:

The Greeks enable traders to determine how sensitive the price of an option contract is to price fluctuations, volatility fluctuations, interest rate fluctuations, and the passage of time. The Option Greeks indicator on Streak works pretty much like an options calculator and provides an excellent opportunity for options traders to create innovative strategies and scanners.