UNDERSTANDING GREEKS IN OPTION PRICING MODEL

Presented by:
Surabhi Kashyap
Samrath Ghosh
Navraj Singh Aneja
Shikha Gupta

ASSIGNMENT 2

FT154020
FT153045
FT151065
FT153023

Delta: Delta measures the change in the price of the option with every $1 change in the
underlying asset. Delta value ranges from 1 to -1 and stands divided by a price change of 1 to 0
for a call option and 0 to -1 for a put option.

Gamma measure the rate of change of delta with a change in the underlying asset price. This
helps forecast the change in delta and thus a consequent change in option prices. It indicates the
benefit to the option holder as a result in fluctuation of the price in the underlying stocks.

Theta represents the sensitivity of the option price with respect to the time to maturity for the
option price assuming everything else is constant. Theta is usually negative as shorter the TTM
time to maturity lower is the value of option.

Vega is the change in the value of the option when the volatility of the stock changes. Both the call
and put options have same vega.

In our analysis keeping volatility, interest rate and Spot price the same, we changed the values of
Strike Price and Time to Maturity to see the consequent changes in the greeks (namely delta,
gamma, theta and vega) of the option pricing model.

Volatality
Interest Rate
Spot Price

15
8
8224

TTM
10 days
Strike Price Delta
Gamma Theta
Vega
8200
0.586
0.0019 -5.1442
5.3394
8250
0.4901
0.0019 -5.0672
5.4665
8300
0.3949
0.0019 -4.7359
5.2773
TTM
2 days
Strike Price Delta
Gamma Theta
Vega
8200
0.6205
0.0041 -11.2225
2.3331
8250
0.4063
0.0042 -10.9424
2.3777
8300
0.2185
0.0032 -7.2414
1.8077

ASSIGNMENT 2

OBSERVATIONS

Delta: For TTM = 10 days and TTM = 2 days we find that for values where the strike price
equals the spot price the delta is close to 0.5. Also delta drops as the difference between the spot
price and strike price increases. As the call option goes deeper in to the money (i.e. Strike price =
8200 as against 8250) the delta value increases and approaches 1. Call option goes deeper out of
the money (stock price below strike price i.e. 8224<8300) the delta value decreases and nears 0.
TTM = 2 days vs TTM = 10 days: We find that as the time to maturity decreases the delta for out
of the money OTM( Strike Price 8300 and 8250 respective delta for TTM 10says vs 2 days is 0.39
vs 0.21 and 0.49 vs 0.46 ) decreases while that of In the money increases( 8200 increases from
0.586 vs 0.625).

Gamma: The Gamma for TTM = 10 days remains the same for all the strike prices (0.0019). We
can understand from this primarily due to the fact that the strike price is almost spread near the
spot price and also that the strike prices are closely distributed not giving enough room for any
variance. A huge increase in the spot price can however lead to a considerable increase in gamma
value.
TTM 10 days vs TTM 2 days: As the options approach maturity we find that gamma for both out
of the money (8300 and 8250) and in the money (8200) have increased. However the gamma
values for strike prices 8250 and 8200 are close to each other indicating certain normally
distributed characteristic of the gamma values.
Theta: Theta value for TTM= 10 days is negative for all the strike prices and similarly for TTM =
2 days varying only in the values. Theta is always negative because it is the loss in option value
due to time decay. As the option approaches expiry, the value of theta becomes more negative for
both in the money and out of the money options. This is because the option starts losing more of
its value per day close to the expiry as it is less actively traded then.
Vega: Vega value for all TTM and strike prices remains positive. The value of vega for a given TTM
and implied volatility are more or less the same. The Vega value for in the money options
decreases as they got deeper in the money. As we can see from the above table, as the in the money
call option of 8200 vega is 5.33 as compared to the out of the money option (5.4). And then again
vega starts decreasing going farther out of the money.
For TTM = 2days, the similar trend is followed, but the absolute values are much lower because
of the fact that only 2 days are left for expiry and so the effect of volatility on option price is
limited.

ASSIGNMENT 2