Anyone who is not into trading often cites the dread for losing his money due to his inexperience for not entering this domain. However, those who are already into it find it to be a bit addictive seeing money all around. It’s true that the risk of losing money is much greater than the probability of gaining from the trading. But this is also why traders are agents are there, who not only help people do trading more easily but also give them an advice or two on how to do it right.
Option trading is unarguably the most popular technique used in this domain. A new trader may find it terribly complex, but if he really gets into it he can find an all-new world that he just won’t want to leave. In general, three primary option forces work in trading, viz:
- Price of an underlying stock
- Its expiry date/time
- The volatility around the stock
Option Greeks is another term that experienced traders always know about. For those who don’t the Greeks determine the measurement of these primary forces. ‘Delta’ determines the price of the stock, ‘Theta’ determines the expiry time, ‘Vega’ determines the volatile nature of the stock, and ‘Gamma’ is what determines Delta’s rate of change in stock value. In other words, Gamma can also be referred as Delta’s second derivative.
Significance of Delta and Gamma
It must be noted here that Delta and Gamma are the two primary driving forces in Option Greeks, since these two terms deal with the value of the stock, which is what everyone seeks. As said above; Delta determines the value of an underlying stock, and how the value changes when this stock moves. For ‘call option’, Delta always has a positive value, while this value changes to negative when it’s about the ‘put option’. The Delta value is never constant, and continues to increase/decrease as per the change in the value of the underlying stock.
Gamma value on the other hand, is always positive for both put option and call option, owing to the constant movement of Delta in either direction. Thus, the Gamma value is not really based on the cost of any stock directly but on how the value of Delta changes with the change in the stock’s cost. Understanding this relationship between these two Option Greeks is very important, because this very relationship is what forms the basis of the trading industry. Anyone who masters this art can become a champion in trading in no time.