Part 4 Institutional Trading Option Pricing: The Greeks
Option pricing is influenced by various factors known as Greeks:
Delta: Measures how much the option price changes for a ₹1 move in the underlying.
Gamma: Measures how much Delta changes for a ₹1 move.
Theta: Measures time decay — how much the option loses value each day.
Vega: Measures sensitivity to volatility.
Rho: Measures sensitivity to interest rates.
Time decay and volatility are crucial. OTM options lose value faster as expiry nears.
Options Trading Strategies
For Beginners:
Buying Calls: Bullish on the stock/index.
Buying Puts: Bearish on the stock/index.
For Intermediate Traders:
Covered Call: Holding the stock + selling a call for income.
Protective Put: Holding stock + buying a put to limit losses.
For Advanced Traders:
Iron Condor: Neutral strategy with limited risk/reward.
Straddle: Buy a call and put at the same strike; profits from big moves.
Strangle: Buy a call and put at different strikes.
Spreads:
Bull Call Spread: Buy a lower call, sell a higher call.
Bear Put Spread: Buy a higher put, sell a lower put.
These strategies balance risk and reward across different market outlooks.
Advantages of Options Trading
Leverage: Small capital can control larger positions.
Risk Defined: Buyers know their maximum loss (premium).
Flexibility: Strategies for bullish, bearish, or neutral markets.
Income Generation: Selling options can earn premiums regularly.
Hedging Tool: Protect portfolios from downside risks.
