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In the last article, you have learn about “delta” . Let us continue…
Gamma is derived from Delta is the odds of a change in Delta. It
also informs in advance if the Delta could be changing. Gammas are
positive for both the call and put. When options are deep in the money
of deep out of the money the Gammas will be near zero as the
probability of a change in Delta are very low. Likewise at strike price
the Gamma would likely to e the highest.
Time decay is reflected in the option position as Theta. Options
bought have negative Theta, which means that each day you do not sell
that option, the time value is declining because of the time decay. In
this case, time decay is making it worse for the buyer of the option.
When you sell options, Theta is positive, meaning that time decay is
good for the option seller.
How volatility affects the option pricing is reflected in the in
Vega. In other words, its sensitivity to volatility. Options tend to
have price increases when the underlying asset’s volatility increases.
In this case, volatility is good for the buyer of an option and bad for
the seller of an option. Vega is positive for long option and negative
for short option.
Rho is how interest rates affect the pricing of the the option.
When interest rates are high and it is good for the position, Rho will
be positive. If interest rates are high but bad for the option
position, Rho will be negative.
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