11.

Options Sensitivities
The sensitivities (denoted by Greek letters, so also called as
Greeks) of option price to a change in underlying asset
parameters that determine the option prices. These are also
called as risk sensitivities, risk measures or hedge
parameters.
The underlying asset parameter include its price, time period,
interest rate and the volatility. There are five measures of
sensitivities: Delta, Gamma, Theta, Rho and Vega.
Spot Price
S

Volatility

Time to Expiration Risk Free Rate

T
r

Option Price V

Delta

Vega

Theta

Rho

Delta

Gamma

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Delta
The delta, , of an option is defined as the ratio of change in the
price of an option to the change in the price of the underlying
asset. An increase in the value of the underlying asset makes
the premiums on calls to increase and the premiums on puts to
decrease. Delta measures the sensitivity of the option price to
the changes in stock prices. Delta of an option gives an idea
about the number of units of a stock that should be held for
creating a riskless hedge. It is ratio of change in option price to
the change in the price of an underlying asset. Hence it is also
called as hedge ratio and the range of its values lie between 0
to 1 for call option and -1 to 0 for put option.
Delta of an option = V / S
V is option value of a single option or a portfolio of options.
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Delta
The delta of a portfolio of options is just the sum of the deltas of all
the individual positions. Portfolio is said to be delta neutral
when the deltas of all the components of that portfolio add up
to zero.

Delta of a call = N(d1)

Delta of a put = N(d1) - 1
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Example on Option Sensitivities

The SBI stock price is Rs. 1800 currently. The risk free rate of
interest is 7% and the volatility is 22%. Calculate the value
of delta for call and put options for the strike price of Rs.
2000 for the period of 2 months from now.
Solution
Hint:

Delta of a call = N(d1)

Delta of a put = N(d1) - 1

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Theta
Theta, , is defined as the as the ratio of change in the price of
an option to the expiration time. It is a measure of option
or derivative sensitivity with respect to expiration time.
Option price changes with the increase and decrease in the
option life. Both call and put options lose value as
expiration approaches. Theta is the rate at which the
option loses value as time passes. The theta is related to the
option value, by the BlackScholes equation.
S N(d1)
r X e r (T t) N(d2)
Theta of a call = 2 T t
S N(d1)
r (T t)

r
X
e
N(d2)
Theta of a put = 2 T t
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Theta
Where d1 and d2 are defined as per Black-Scholes model.
1 d 2 / 2
N(d)
e
2

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Example on Option Sensitivities

Tata Steel is currently quoted at Rs. 500. The volatility is 22%
and the risk free rate of interest is 5.5%. Calculate the value
of theta for the call and put options for the strike price of Rs.
600 for a period of 3 months from now.
Solution
Hint:
S N(d1)
r (T t)

r
X
e
N(d2)
Theta of a call = 2 T t
S N(d1)
r (T t)

r
X
e
N(d2)
Theta of a put =
2 Tt
1 d 2 / 2
N(d)
e
where
2

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Vega
Vega measures the sensitivity of the option price with respect to
the volatility of the underlying asset. (Vega is not a Greek
letter, the Greek letter nu, is used instead). Vega can be
termed as the first derivative of an option price with respect
to the volatility of the underlying asset. Since volatilities
change over a certain time period, the option premium of
both call and put is liable to behave accordingly. Vega of a
call and put will always be identical and positive because all
options gain value with rising volatility.
In practice, the volatility of the underlying is not known with
certainty. Not only is it very difficult to measure at any time,
it is even harder to predict what it will do in the future.
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Vega
Vega of call or put = S T - t N(d1)
1 d1 2 / 2
e
whereN(d1)
2

Value of an at-the-money call option as a function of volatility

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Rho
Rho, , is defined as a measure of the sensitivity of the option
price to change in the interest rates used in the Black
Scholes formulae. Rho is the first derivative of an option
premium with respect to the interest rate. Call option is
positively related to the interest rate whereas put option is
negatively related to the interest rate. Thus, Rho of any call
will be always positive and Rho of any put will always be
negative.
X (T - t) e r (T t) N(d2)
Rho of a call =

- X(T - t) e r (T t) N( - d2)
Rho of a put =
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Gamma
The gamma, , of an option is the rate of the change of the
options delta with respect to the price of the underlying
stock. Gamma of any option indicates the sensitivity of
delta with respect to the change in the stock prices. The
gamma of a put and call will always be equal. Gamma is
second
order derivative of option premium with respect to
2V
2
the
. It is a measure of by how much or
S stock prices,
how often a position must be rehedged in order to maintain
a delta-neutral position.
N(d1)
Gamma of a call or a put =S T - t
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Gamma
Gamma also varies with the time remaining until expiration.

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Further Reading
NSE Link
http://www.nseindia.com/content/ncfm/sm_otsm.pdf

Chicago Board of Trade (CBO) Link

http://www.cboe.com/LearnCenter

*****
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