Before learning how to use our option calculator, it is important you learn some basics about option greeks. The jargon dictionary of options traders, there are words like Delta, theta, Gama and Vega. If you’re not acquainted with these terms, you are missing out for sure. Options greeks are mathematical variables which effect the price of the option in different ways before expiry.
1. Delta: It is the rate of change of the option price in comparison with the underlying stock price. It is measured in the range of 0 – 1. If the option moves relatively more in the direction of the underlying stock price, then the delta will be closer to 1. In practice, ITM options have a higher delta because there is intrinsic value priced into the option along with a lesser premium. The delta of an option can behave differently when the stock price goes up and down. It may not necessarily be the same. For instance, let’s say the underlying stock price goes up by 1 and the options price goes up by 0.7. It means that the up delta of the stock is 0.7 whereas if the stock goes down by 0.7 the options price may go down only by 0.5. This is known as down delta. Call options have positive delta whereas put options have negative delta because the price of a put option is inversely correlated with the underlying stock price. Keep in mind that far OTM options have a lesser delta whereas ITM have the highest data because they already have intrinsic value and carry little premium. This is especially true of deep ITM options.
2. Gamma: Is the rate of change of Delta. It reflects the change in delta for every 1 point movement in the stock price. ATM options have the highest Gamma and far OTM or ITM have a very less or zero Gamma. Gamma is high in the beginning of a contract and goes down in the ITM & OTM options as the expiry is near. The Gamma of an option is highest when the volatility is low. Whereas when volatility is high, the gamma tends to be flat because the movement of option prices has been priced in to some extent.
3. Theta: In simple words, it refers to the rate at which the option loses its value. It measures the time decay in options with the passage of time. Options which expiry in the near term will lose their value faster than long term options. This is simply the premium present in options will diminish. Options of volatile stocks will have a higher theta than stocks which are not volatile. Due to this, as the expiry approaches, the value of these options will lose towards expiry will be higher as there is a higher premium.
4. Vega: It is the change in the options price in relation to the change in volatility of the stock price. In other words, it is the measure of how much the option price moves on a scale of 0 to 1 in relation to the volatility in the underlying stock. This can seem very complicated at first. I’ll explain this with a simple example. Let’s say the volatility of a stock goes up from 20% to 21%, how much the price of the option changes to this change in volatility is Vega. Again due to the limited time period expiry of options, the longer time there is to expiry, the higher will be the Vega. As expiry nears, the volatility premium dies down and hence the Vega naturally reduces.
5. Rho: It is another greek which measures change in options price relative to the change in the risk free interest rate of the country. Although interest rates don’t change very often, it makes sense to consider this one into your analysis. If Rho is 1, then every percentage point change in the risk free interest rate will change the price of the option by 1%.
How to use Option Calculator:
To access our too, click on “FnO Analysis” in the main menu and select “Options Calculator”.
Selection: You can select any options contracts you want to analyse using the option calculator on Fyers One. Just choose from the search bar and get started.
There are 2 parts in the option calculator:
• Inputs – These values are automatically updated when you select your preferred derivative contract from the scrip search menu as shown in the previous menu. However, you can manually change and enter your preferred values in the input fields to get different results. Interest Rate %, volatility and dividend rate will be especially customizable. Time to Maturity is automatically updated but you can change that as well to simulate different results.
• Prices & Greeks (Output) – Once you enter the values or use the default values in the input fields and click on Calculate, the outputs will get automatically calculated.
As you can see in the image above, the option calculator results will be displayed like this. This calculator simplifies and reduces your input requirements as much as possible. Unlike other option calculators in India, ours also displays the Rho. Also, you can get the option greeks of both, call options and put options in the same output screen. The option pricing model used in this calculator is Black-Scholes Model because it is the most widely used option pricing model around the world today. It’s time to get started with our Options Calculator for NSE scrips.
Tejas is the Co-Founder & CEO at FYERS, the youngest team to get NSE’s broker license. He has a specialization in finance and has over 10 years of work experience spanning across proprietary trading, risk management, and broking. Tejas & his team started FYERS, a technology-focused brokerage as a mission to transform the trading/investment landscape in India.