Option Greeks Definitions, Types and Its Impact on Trading

Option Greeks are mathematical measures that quantify how an option's price will change in response to various factors. Named after Greek letters (Delta, Gamma, Theta, Vega, Rho), these metrics are essential for understanding risk, constructing strategies, and managing positions effectively. Without understanding Greeks, you're essentially trading blind—unable to predict how your positions will behave as market conditions evolve.

Greeks are derived from option pricing models (primarily Black-Scholes) and represent partial derivatives—rates of change. While the mathematics can be complex, the intuitive understanding is accessible and critically important for every options trader, from beginners to professionals.

Delta measures how much an option's price will change for a ₹1 move in the underlying asset. It is the most fundamental Greek, representing directional exposure. Delta also approximates the probability that an option will expire in-the-money.

• Call options have positive delta (0 to 1.0): A delta of 0.50 means the option gains/loses ₹0.50 for every ₹1 move in the underlying.
• Put options have negative delta (0 to -1.0): A delta of -0.40 means the put gains ₹0.40 when underlying falls ₹1.
• ATM options have delta around 0.50 (calls) or -0.50 (puts)—balanced directional exposure.
• Deep ITM options approach 1.0 delta (calls) or -1.0 (puts)—behaving almost like owning the underlying.
• Far OTM options have low delta (0.10-0.20)—require large underlying moves to profit.
• Portfolio delta: sum all deltas to understand net directional exposure (+100 delta ≈ long 1 lot of underlying).

Gamma measures how fast delta changes as the underlying price moves. It represents the acceleration of your position. High gamma creates both opportunity (rapid profit) and risk (rapid loss). Gamma is highest for ATM options and increases dramatically as expiry approaches.

• Long options have positive gamma: Delta increases as the underlying moves favorably, accelerating profits.
• Short options have negative gamma: Delta works against you as underlying moves, accelerating losses.
• ATM options have highest gamma: Small price moves create large delta changes.
• Near expiry, gamma explodes: ATM options in the final week have extreme gamma risk.
• ITM/OTM options have low gamma: Delta changes slowly, more predictable behavior.
• Gamma scalping: Professional strategy of trading underlying against option gamma to capture time decay.

Theta measures how much option value erodes per day as time passes. It is typically expressed as a negative number for long options (you lose theta) and positive for short options (you earn theta). Theta accelerates exponentially as expiry approaches, making it the most painful Greek for option buyers.

• ATM options have highest theta: Maximum time value means maximum decay.
• Theta accelerates near expiry: Options lose 50% of their time value in the last 7-10 days.
• Long options bleed theta: Lose value every day even if underlying doesn't move.
• Short options collect theta: Profit from time passage if other factors remain constant.
• Weekend and holiday theta: Time passes but markets are closed—decay continues.
• Theta is non-linear: Decay rate increases as expiry approaches, following a curve not a straight line.

Vega measures how much an option's price changes for a 1% change in implied volatility (IV). Vega risk is often underestimated by beginners but can dominate P&L, especially around events. High IV options are "expensive" and low IV options are "cheap" in a relative sense.

• Long options have positive vega: Benefit from IV increases (volatility expansion).
• Short options have negative vega: Benefit from IV decreases (volatility contraction).
• ATM and near-dated options have highest vega: Most sensitive to volatility changes.
• Volatility crush: After earnings/events, IV collapses—long option buyers suffer even if direction was correct.
• India VIX correlation: When VIX rises 10%, option premiums might increase 15-25% (depending on vega).
• IV percentile matters: Buying options at 80th percentile IV is statistically unfavorable; selling at 20th percentile is also risky.

Rho measures sensitivity to interest rate changes. For retail traders with short-dated options, rho is typically negligible and can be ignored. It becomes more relevant for long-dated options (LEAPS) or institutional traders.

• Call options have positive rho: Higher interest rates increase call premiums slightly.
• Put options have negative rho: Higher interest rates decrease put premiums slightly.
• Generally small impact: Rho impact is minor compared to delta, theta, and vega for typical trades.
• Relevant for LEAPS: For options with 6+ months to expiry, rho can have noticeable cumulative impact.

Greeks are not static numbers—they change continuously as market conditions evolve. This dynamic nature means you must monitor Greeks regularly, especially for short-dated or ATM positions.

• Delta changes with price (gamma effect): An OTM option can become ATM, dramatically changing delta.
• Gamma changes with moneyness and time: Explodes for ATM options near expiry.
• Theta accelerates near expiry: Non-linear time decay intensifies in final week.
• Vega decreases as expiry approaches: Long-dated options have higher vega than short-dated.
• Greeks interact: Gamma affects delta, which affects vega; all Greeks are interconnected.

Understanding Greeks theoretically is different from applying them practically. Here's how to use Greeks to make better trading decisions:

• Use portfolio delta to manage directional exposure: +300 delta means you benefit from a 100-point Nifty rise by roughly ₹30,000.
• Monitor theta daily: If your position has -₹500 theta, you're losing ₹500 per day to time decay—is your directional edge strong enough?
• Avoid buying high vega options before events unless you have a specific IV view: Volatility crush can erase directional profits.
• Watch gamma risk near expiry: Short ATM options in the final week can turn catastrophic quickly.
• Build positions with complementary Greeks: Short high-theta positions to finance long delta exposure (spreads).
• Use Greek scenario analysis: Model how your P&L changes if underlying moves ±5%, IV changes ±20%, time passes 3 days.
• Set alerts based on Greeks: Exit or adjust when delta exceeds tolerance, theta burn accelerates too much, or gamma risk becomes uncomfortable.

Greeks change continuously with price, time, and volatility. Treat them as "live" exposures that require active monitoring, not constants that remain fixed. Professional traders review Greeks multiple times per day for active positions, adjusting strategies as Greek profiles change. Master Greeks, and you master options risk management.