Option Greeks
Module Units
- 1. Introduction To Greeks
- 2. Black Scholes Model
- 3. Introduction To Delta
- 4. Delta’s Relationship With Spot And Strike Price
- 5. Delta And Time To Expiry
- 6. Delta And Volatility
- 7. Delta Adds Up
- 8. Delta Hedging
- 9. Introduction To Gamma
- 10. Gamma’s Relationship With Spot And Strike Price
- 11. Gamma And Time To Expiry
- 12. Gamma And Volatility
- 13. Important Properties Of Gamma
- 14. Introduction To Theta
- 15. Theta’s Relationship With Spot And Strike Price
- 16. Theta And Time To Expiry
- 17. Theta And Volatility
- 18. Important Properties Of Theta
- 19. Rho
- 20. Introduction To Vega
- 21. Vega’s Relationship With Strike Price
- 22. Vega And Time To Expiry
- 23. Volatility
- 24. Volatility And Normal Distribution
- 25. Types Of Volatility
- 26. The VIX Index
- 27. Volatility Smile
- 28. Delta Neutral Hedging
- 29. Calendar Spread
- 30. Diagonal Spread With Calls
- 31. Diagonal Spread With Puts
- 32. Gamma Delta Neutral Option Strategy
- 33. Gamma Scalping
- 34. Put Call Parity
- 35. Options Arbitrage
- 36. Conversion-Reversal Arbitrage
- 37. Box Spread
- 38. Conclusion
Theta And Volatility
Theta with respect to changes in volatility:
In general, options of highly volatile stocks have higher Theta than those which are less volatile. This is because the time value premium on these options is higher, and so they have more to lose each day.
Let us consider Spot at 16500, days to expiry 17
From the table we can see that regardless of the option’s strike price (ATM/ITM/OTM), Theta always increases as Volatility increases. Like for strike 16500, Theta increases from 0.3 to 33 as volatility increases from 1 % to 100%.
Please note that negative sign, which means losing the time value, is ignored when doing the comparison.
As can be seen, for all the three options with different volatility, Theta always behaves the same way, i.e. Theta of ATM options is always higher, and it gets lower as it moves towards deep ITM or OTM.
However, a decrease in Theta as the option moves from ATM towards deep OTM/ITM will be much bigger for options with higher volatility as compared to options with lower volatility.
This is understandable because options with higher volatility will contain more time value than options with lower volatility. Since Theta decreases due to the passage of time, it will naturally be higher for options with higher volatility as it has more time value to lose compared to options with lower volatility.
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