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July 25, 2017 
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Option Master Chapter 6
Download the Option Master Manual - PDF 187k

 

Software for Pricing Options
by Kenneth R. Trester
and Robert P. Swanson


Chapter 6 - Behold the "Greeks"


OPTION MASTER® for Windows, DOS and the Newton will calculate the Delta, Gamma, Theta and Vega. Professionals frequently use these ratios to create Delta neutral strategies where they profit regardless of what the market does. But "Delta neutral" strategies involve a lot of trading to keep the position neutral and therefore are not advised unless you are on the floor of an exchange.

These four ratios are again defined below:

DELTA -- is the percent of a point that the theoretical value of an option will change for a one-point change in the underlying stock, index or futures. For example, if a call stock option has a Delta of .50, the stock option will move up 1/2 of a point for every point that the stock moves up one point.
 
GAMMA -- is the amount the Delta will change if the underlying stock index or futures changes one point. For example, if the Delta is .50 and the Gamma is .10, if the stock price increases by one point, the Delta will increase to .60 (.50 + .10 = .60).
 
THETA -- is the time decay factor and is the rate at which an option will lose value as each day passes. For example, a Theta of .33 indicates that an option price will decrease in value .33 of a point as each day passes.
 
VEGA -- is the point change in the theoretical value of an option for a one percentage point change in volatility. For example, if an option has a Vega of .50 to each percentage point increase in volatility, the option will gain 1/2 of a point.

The Delta is the most valuable ratio for most option traders. If you are an options buyer, you want a high Delta, and if you're an options writer, you want a low Delta.

To calculate the "Greeks," click on Calculate in the main menu bar and then select Ratios and then select whether you want Futures Options or Stock and Index Options.


Go to Chapter 7 | Return to Table of Contents


 
 
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