# Option Greeks Part 2

Option premium changes with respect to changes in several factors that determine the option pricing, like strike price, volatility, time to expiry etc. The commonly tracked and analysed studies are collectively called “Greeks”. They are delta, Gamma, Theta, Vega and Rho. Let us understand each Greek in detail.

**Delta**

The is the most important Greek in the option and is tracked by day traders and swing traders. Delta measures the change in the option premium with regard to a change in the price of underlying. It can be also referred as the speed with which an option premium moves with respect to the price of the underlying stock or index or any financial instrument.

**Delta = Change in option premium / change in the price of underlying asset**

Delta for call option buyer is positive , it means that the value of the option contract (premium) increases as the price of underlying rises or increases. Delta for call option sellers will be the same in terms of price movement but will be opposite (negative).

Let’s assume delta for nifty CE 19500 strike is 0.50. It means for every 10 points up move in nifty the call option will move up by 5 points. Delta is also referred to as the hedge ratio. If you have a portfolio of “n” shares of a stock then “n” divided by the delta gives you a number of calls you would need to write to create a hedge.

**Gamma**

It measures the change in delta with respect to the change in the price of the underlying. This is referred as the second derivative in option with regard to the price of the underlying asset. It is calculated as the ratio of change in delta for a unit change in the market price of the underlying asset.

**Gamma = Change in an option delta /unit change in the price of underlying asset**

Gamma works as an acceleration of the delta. It signifies the speed with which an option will will become based on moneyness i:e ITM (in the money) or OTM (out of the money) due to change in price of the underlying asset.

**Theta**

It is a measure of an option’s sensitivity to time value decay. Theta is the change in option price given a one day decrease in time to the expiration. It is a measure of time value decay. Theta is often understood to have an idea of how much time decay is affecting you options position.

**Theta = Change in an option premium / change in time to expiry**

Usually theta is negative for a long option whether it is a call option or a put option. Other variables being equal ,options tend to lose time value each day.

**Vega**

This is a measure of the sensitivity of an option price to changes in market volatility.It is the change of an option premium for a given change in the underlying volatility.

**Vega = Change in an option premium/change in volatility**

Vega is positive for a long call and a long put.

**Rho**

Rho is the change in option price given a one percentage change in risk free interest rate.

**Rho = Change in an option premium / change in cost of funding the underlying**