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How to maximize your earnings using Option Greeks, Delta Value, and Theta


Option Greeks help in defining the inter-relationship of the factors affecting the Option Premium. By knowing about the factors, it is easier to predict the movement of the premium which helps in better Options Trade. Option Greek is useful in measuring the option price sensitivity to its underlying parameters


The option price is affected by various factors that may or may not support the trade. It all depends upon the different types of positions that the trader has selected.


Option Greeks are not that easy to compute and it will require different ways to understand them instead of using calculators.


Once you know the meaning of Option Greeks, you can earn a huge profit. You need to learn about the two Option Premium interrelationships; Index or Underlying stock's price and the price.


What is Option Delta and how does it work?


Traders who want to earn money considering the movement in price but to avoid the unfavorable price movement and related loss, then you would buy the options. The Call Premium will rise once the price of the underlying increases. The Option Delta is the Option Greeks that will help you learn exactly how much the price rises.


Option Delta shows you how much the Option Premium rises according to the rise in the underlying price. So, let's say if there is an Option Delta value of 0.5 per 1,000 calls that has the underlying price of Rs. 1,000, then if there is a rise in the stock's price of Rs.10 making the total amount Rs. 1,010 then the call premium according to the Option Delta Value will rise to Rs. 5 making it 10x0.5.


So, as you can see, this Delta does not stay constant for the option. If the underlying price is 1,000, here per 1,000 the call has a Delta value of 0.5. Now let's say the stock price has gone down to 950 and the value of Delta goes below 0.5, let's assume it becomes 0.4. Around the same time, when the price is 1,050, then the delta value can become around 0.6


You will find this situation completely in favor of you when the option movement is fast for the favorable move and on the other hand, it is moving slower with the unfavorable move.


Use the Delta Value in your Options Trading?


You can easily determine if the move is in your favor or not just by looking at Delta's Value. Every single Put Option and Strike Call has its own Delta so this is why you must select the best Strike price that ultimately tells you the total money allocated for buying premium and getting the expected results.


It is all related to the move happening for upcoming hours and minutes. So it all ultimately affects the option premium. When time passes, the Option Premium will reduce.


Delta is represented by the symbol Δ. Option Delta determines the sensitivity of the option price change with the underlying asset’s price change. If the underlying asset's price increases by Rs. 10, then the option price will change according to the Δ amount.


To measure the delta for options, traders may use different scales of measurement. The measurement scales normally are from 0 to 1. Many other traders prefer to use a scale of measurement sales from 0-100. By using this scale, the delta option value you get will also be different for 0-1, it will be around 0.5 and for 0-100, it will be around 60.


Delta ultimately is a positive aspect of the call options. When the increase in the stock price is positive for the Call Options, this becomes. When you get the positive delta that means you are long in the market and when you get the negative delta, then you will be short on the market.


Delta depends on various factors such as rate of interest, volatility, maturity time, and others. And Delta is always changing after a while. Traders can also use Delta to hedge risks effectively.


Meaning and Use of Theta


We have seen that Delta measures the impact of the price change in the underlying. Now before learning about the Use of Theta, you must learn the basic meaning of Theta. Theta measures the impact of the remaining Time's change or changes happening in the time that is remaining. In simple words, it measures the Time Decay's rate of the Options value and its premium.


Theta shows you the option value price decay because of the passing of time. Whenever this happens due to the passage of time, the option starts giving you less and fewer profits. And this time decay leads the options quickly to their expiry dates due to very less time remaining to make a profit out of any Options Trade.


The value of Theta stays negative for an option because of the movement of the time in the same direction. Once the trader buys an option, then the time decay starts affecting the option value and it keeps diminishing till it reaches the predetermined expiry date.


In Options Trade, Theta is positive for the sellers but at the same time, it is not good for buyers. If you are a buyer, you must decide when to exercise your option before the expiration date. The value will not decrease rapidly but slowly as time passes so the buyer has to decide if he wants to bear the loss.


The Theta can be represented by the θ symbol.


Highlights of the Use of Theta,


  • Theta is not a constant and keeps changing with the price of underlying time.

  • The Theta value of the option helps in determining the number of days with the help of multiplication and checking its impact on every single additional day.

  • Theta and Delta both are readily available applications for options analytics.


Summary


In an Options Trade, you need to know about the Greeks because they help in providing a critical measurement of the risk of options positions and what are the gains. When you are clear about the concept, you can focus more on the strategies that you have currently implemented. You must determine the measures for risk exposure to make more money. The market never stays the same and changes constantly. Greeks will make your Options Trade more profitable and you can trade by focusing on the fluctuations in the price.

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