Vega (Kappa, Omega, Tau): sensitivity of option value to change in volatility. NOTE: seven-day Theta changes to one-day Theta if days to expiration is seven or less. Results may not be exact due to rounding. For example, a Theta of -250 indicates the option's theoretical value will change by -0.250 if the days to expiration is reduced by 7. The option calculator assumes "one unit" of time is seven days.
Theta indicates an absolute change in the option value for a "one unit" reduction in time to expiration. Theta: sensitivity of option value to change in time. For example, a Rho of 0.060 indicates the option's theoretical value will increase by 0.060 if the interest rate is decreased by 1.0. Rho indicates the absolute change in option value for a one percent change in the interest rate. Rho: sensitivity of option value to change in interest rate. The expected percent change in the value of an option for a 1 percent change in the value of the underlying product. For example, a Gamma change of 0.150 indicates the Delta will increase by 0.150 if the underlying price increases or decreases by 1.0. Gamma indicates an absolute change in Delta. Gamma: sensitivity of Delta to unit change in the underlying. Changes in price of stock and time to expiration will have an effect on the Delta value. The call options will have their price increased by $1.00 and the put options will have their price decreased by $1.00. Therefore the price of the options will change by (0.50 x 2) = 1.00. As the price of the stock changes by $2.00 the price of the options will change by 50 cents for every dollar. In this example, the Delta for stock XYZ is 0.50. As options near expiration, in-the-money contracts approach a Delta of 1. For a put option contract, the premium rises as stock prices fall. For a call option, a Delta of 0.50 means a half-point rise in premium for every dollar that the stock goes up. The Greeks in options trading are a collection of statistical values (expressed as percentages) that give the investor a better overall view of how a stock has been performing.īeta: a measure of how closely the movement of an individual stock tracks the movement of the entire stock market.ĭelta: a measure of the relationship between an option price and the underlying stock price. Volatility measured by annual standard deviation.Time remaining until expiration expressed as a percent of a year.
The variables of the Black Scholes formula are: While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration, and expected stock volatility. The Black-Scholes formula was the first widely used model for option pricing. If there is enough trading interest in an option that is close to the money, that option will generally be fairly priced. This is similar to an efficient market hypothesis. This is called using the implied volatility - that is, the volatility that the market itself is implying. There is a way in which the strategist can let the market compute the volatility for him. In the Black-Scholes model, volatility is defined as the annual standard deviation of the stock price. The computation of volatility is a difficult problem for mathematical application. That is, the volatility that the market itself is implying. Implied Volatility - a measure of how much the "market place" expects asset price to move, for an option price. Statistical Volatility - a measure of actual asset price changes over a specific period of time. There are two types of options trading volatility: statistical volatility and implied volatility. The official mathematical value of volatility is denoted as "the annualized standard deviation of a stocks daily price changes." Volatility shows the options investor the range that a stock's price has fluctuated in a certain period. Volatility can be a very important factor in deciding what kind of options to buy or sell. When you're ready, complete the Firstrade online application to start investing! Volatility In this section, we help you understand volatility and the Greeks in options trading. Firstrade offers options trading education to help you better understand trading and investing.