Manage Complex Option Portfolios:

Simplifying Option Greeks – Part II

Monday, 11th September

7:30 PM IST | 2:00 PM GMT | 10:00 AM EST

A Pioneer Algo Trading Training Institute Streamlined Investment Management

 About the Speaker

Rajib Ranjan Borah

Co-Founder & Director - QuantInsti™

Rajib manages the course segment on option derivatives and also works with exchanges,
financial & educational institutions to design educational programs. He has conducted
workshops and conferences in America, Europe and Asia.

Rajib worked with leading HFT firm Optiver in Amsterdam on options derivatives market
making & high frequency equity arbitrage strategies across all major European & US
exchanges. Before Optiver, Rajib was a management strategy consultant with
PricewaterhouseCoopers where he assisted a consortium in setting up a national commodity
derivatives exchange.

A national Olympiad finalist, Rajib has twice represented India at the World Puzzle
Championships. He has a post-graduate management degree from the Indian Institute of
Management Calcutta, a bachelor’s degree in Computer Engineering from the National
Institute of Technology Surathkal; and has internship experiences with Bloomberg in New York
(equity option derivatives research) & with Solutia’s EMEA strategy HQ in Belgium. 2
 Delta

 Price of option from Black Scholes formula

Ct = SN (d 1) − Xe − rt N (d 2 )
 Delta = ∂C/∂S or ½(∂C/∂S- + ∂C/∂S+) to be more precise
= N(d1)

St σ2
ln( ) +(r + )t
d1 = X 2
σ t
z2
x −
1 2
N ( x)=
2π ∫e
−∞
dz

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 Delta

i.e. Delta is dependent on:

 underlying price,
 time to expiry
 volatility

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 Gamma: Delta vs Underlying Price

 Call Delta vs Underlying Price

1.000

0.900

0.800

0.700

0.600
Delta of option

0.500 Call 90 Strike

Call 100 Strike
0.400
Call 110 Strike
0.300

0.200

0.100

0.000
80 85 90 95 100 105 110 115 120
Underlying Price

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 Gamma: Delta vs Underlying Price

 Put Delta vs Underlying Price

0.000
80 85 90 95 100 105 110 115 120
-0.100

-0.200

-0.300

-0.400
Delta of option

Put 90 Strike
-0.500
Put 100 Strike
-0.600 Put 110 Strike

-0.700

-0.800

-0.900

-1.000
Underlying Price

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 Charm: Delta vs Time

 Call Delta vs Time left to expiry

1.000

0.900

0.800

0.700

0.600
Delta of option

0.500 Call 90 Strike

Call 100 Strike
0.400
Call 110 Strike
0.300

0.200
Underlying Price = 100
0.100 Volatility = 20%

0.000
0.0001 25 50 75 100 125 150 175 200
Days to Expiry

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 Charm: Delta vs Time

 Put Delta vs Time left to expiry

0.000
0.0001 25 50 75 100 125 150 175 200
-0.100

-0.200

-0.300

-0.400
Delta of option

Put 90 Strike
-0.500 Put 100 Strike
Put 110 Strike
-0.600

-0.700

-0.800 Underlying Price = 100

Volatility = 20%
-0.900

-1.000
Days to Expiry

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 Vanna: Delta vs Volatility

 Call Delta vs Volatility

1.000

0.900

0.800

0.700

0.600
Delta of option

0.500 Call 90 Strike

Call 100 Strike
0.400
Call 110 Strike
0.300

0.200

0.100

0.000
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
Implied Volatility

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 Vanna: Delta vs Volatility

 Put Delta vs Volatility

0.000
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
-0.100

-0.200

-0.300

-0.400 Put 90 Strike

Delta of option

Put 100 Strike

-0.500
Put 110 Strike
-0.600

-0.700

-0.800

-0.900

-1.000 Implied Volatility

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 Gamma

 As we have seen, deltas change with underlying price (more

so towards expiry)
 Gamma is the second derivative of the change of option price
with respect to change in underlying price
= ∂2C/∂S2 = ∂Δ/∂S = N’(h)/ (Sσ√t)

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 Speed: Gamma vs Price of Underlying

 Gamma vs Price of Underlying

0.060

0.050

0.040
Gamma of option

0.030 Call 90 Strike

Call 100 Strike

0.020 Call 110 Strike

0.010

0.000
80 85 90 95 100 105 110 115 120
Underlying Price

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 Color: Gamma vs Time

 Gamma vs Time
0.500

0.450

0.400

0.350
Delta of option

0.300

0.250 Call 90 Strike

0.200 Call 100 Strike

Call 110 Strike
0.150

0.100

0.050

0.000
0.0001 25 50 75 100 125 150 175 200
Days to Expiry

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 Zomma: Gamma vs Volatility

 Gamma vs Volatility
0.500

0.450

0.400

0.350

0.300
Delta of option

0.250 Call 90 Strike

Call 100 Strike
0.200
Call 110 Strike
0.150

0.100

0.050

0.000
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
Implied Volatility

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 Vanna: Vega vs Underlying Price

 Vega at different strikes

0.200

0.180

0.160

0.140

0.120
Vega of option

0.100 Call 90 Strike

Call 100 Strike
0.080
Call 110 Strike
0.060

0.040

0.020

0.000
80 85 90 95 100 105 110 115 120
Underlying Price

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 Veta: Vega vs Time

 Vega of an option with varying time left to expiry

0.350

0.300

0.250
Vega of option

0.200
Call 90 Strike
0.150 Call 100 Strike
Call 110 Strike
0.100

0.050

0.000
0.0001 25 50 75 100 125 150 175 200
Days to Expiry

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 Vomma: Vega vs Volatility

 Sensitivity to volatility is sensitive to volatility itself

0.180

0.160

0.140

0.120
Vega of option

0.100
Call 90 Strike
0.080 Call 100 Strike

0.060 Call 110 Strike

0.040

0.020

0.000
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
Implied Volatility

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 Thega: Theta v/s Time to expiration

 Theta with changing time to expiry

0
0 20 40 60 80 100 120

-20

-40

-60
Theta

K=100
-80
K=110
K=90
-100

-120

-140

-160
Days to expiry

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Questions?