The Impacts of TIME REMAINING TO EXPIRATION on OPTIONS GREEKS: Summary

The Effect of Time Remaining To Expiration on DELTA
Delta is a measure of the change in the option price resulting from a change in the underlying stock price.

An option’s Delta does change as one trading day passes. This is often called as “Delta Decay”.
As the expiration is nearing (time to expiration gets shorter), the time value portion of an option is declining (time decay effect).
This causes the delta of ITM (In-The-Money) options to increase (i.e. ITM option’s delta gets closer to 1 for Calls or to -1 for Puts) and the delta of OTM (Out-of-The-Money) options to decrease (i.e. OTM option’s delta gets closer to 0).

As a result:
For ITM options, for the same strike price, the longer days to expiration, the lower the delta. Hence, a next month ITM option will have a lower delta than the current month option.
On the other hand, for OTM options, for the same strike price, the longer days to expiration, the higher the delta. So, a next month OTM option will have higher delta than the current month option.

The Impact of Time Remaining to Expiration on THETA
As mentioned earlier, as the expiration is nearing (fewer days to expiration), the time value portion of an option will be declining due to “time decay” effect.
And Theta is a measure of the Time Decay, i.e. the rate of decline of option’s time-value resulting from the passage of time.

Theta (time decay) increases as an option gets closer to expiration.
Theta would increase sharply (resulting in time value decrease at an accelerating rate) in the last few weeks before expiration (particularly in the last 30 days before expiration). Therefore, this can severely undermine a long option holder's position.

However, please note here that Theta increase sharply (Time Value decreases at accelerating rate) as expiration nears is true only for ATM option.

For both ITM & OTM options, on the other hand, Theta decreases as an option is approaching expiration.
As a result, for both ITM & OTM options, Time Value actually decreases at a decelerating rate as expiration nears.


Please refer to “More Understanding about Options Time Value” for further discussion about this.

The Effect of Time Remaining to Expiration on VEGA
Vega is a measure the sensitivity of an option’s price to changes in Implied Volatility (IV).
Assuming all other things unchanged, Vega decrease as an option gets closer to expiration.

Vega is higher when there is more time remaining to expiration. This makes sense because options with more time remaining to expiration have larger portion of time value, and it is the time value that is affected by changes in volatility.

Related Posts:
* Option Greek
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Learning Candlestick Charts
* FREE Trading Educational Videos You Should Not Miss

Read More

Reading Links

Another few good readings:

* Stock Bandit: Trading With Objectivity

* Trader Psychology: Who Should Not Be A Trader?

* Chris Perruna: 10 Steps to Profitable Trading

* Stock Trading To Go: Timeline of 17 Recessions and World Crises Since Great Depression

* Afraid To Trade: Confirmed Bear Market Rally Underway

Read More

Options Greeks and Position in the Market (Long vs. Short): Summary

DELTA and the position in the market:
* Long calls have positive delta; short calls have negative delta.
* Long puts have negative delta; short puts have positive delta.
* Long stock has positive delta; short stock has negative delta.

Positive delta means that the option’s value will increase when the underlying stock price increases, and will decrease when the stock price decreases (positive relationship).
Negative delta means that the option’s value will increase when the underlying stock price drop, and will decrease when the stock price rises (negative relationship).

For Calls, the value of delta ranges from 0 to 1, whereas for Puts from -1 to 0.
Calls have a positive delta because Call premiums increases when the underlying stock price increases, and vice versa, assuming all other factors remain the same.
In contrast, Puts have a negative delta because the Put option price drops when the stock price goes up, and vice versa.

GAMMA and the position in the market:
* Both long calls and long puts always have positive gamma.
* Both short calls and short puts always have negative gamma.
* Stock has zero gamma because its delta is always 1.00 – it never changes.

Positive Gamma means the delta will increase when the underlying stock price increases, and will decrease when the stock price decrease (positive relationship).
Negative Gamma means the delta will decrease when the underlying stock price rises, and will increase when the stock price drops (negative relationship).

What does “long calls and long puts have positive gamma” mean?
What does “short calls and short puts have negative gamma” mean?
Please refer to the following post for further discussion about this:
Option Greek: GAMMA

THETA and the position in the market:
* Long calls and long puts always have negative theta.
* Short calls and short puts always have positive theta.
* Stock has zero theta – its value is not eroded by time.

Positive theta means that the option value will increase as the time passes, while negative theta means the option value will fall as the time passes.
Therefore, it makes sense that long options have negative theta and short options have positive theta.
If options are continuously losing their time value as days pass, a long option position will lose money because of theta, whereas a short option position will make money because of theta.

VEGA and the position in the market:
* Long calls and long puts both always have positive vega.
* Short calls and short puts both always have negative vega.
* Stock has zero vega – it’s value is not affected by volatility.

Positive vega means the option price increases when volatility increases, and decreases when volatility decreases.
Negative vega means the option price decreases when volatility increases, and increases when volatility decreases.

RHO and the position in the market:
Long calls and short puts have positive rho.
Short calls and long puts have negative rho.

Positive rho means the option price increases when the interest rate increases, and decreases when the interest rate decreases.
Negative rho means the option price decreases when the interest rate increases, and increases when the interest rate decreases.

For more detailed discussion, go to: Option Greeks.

Related Posts:
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* FREE Trading Videos from Famous Trading Gurus

Read More

Options Greeks vs. OTM, ATM & ITM Options: Summary

1) Option Greeks: DELTA
Delta is a measure of the change in the option price resulting from a change in the underlying stock price.

The delta values will be positive for Calls & negative for Puts.

At-the-money (ATM) options have (absolute) deltas around 0.5.
Out-of-the-money (OTM) options have (absolute) deltas between 0 to 0.5.
In-the-money (OTM) options have (absolute) deltas between 0.5 to 1.




2) Option Greeks: GAMMA
Gamma is a measure the rate of change of delta due to a one-point change in the price of the underlying stock.

Unlike delta, gamma is always positive for both Calls and Puts.

Gamma is the highest for the ATM options, and gradually gets lower as it moves furthers towards ITM and OTM.
That means that the delta of ATM options changes the most when the stock price moves up or down, as compared to ITM & OTM options.

3) Option Greeks: THETA
Theta is a measure of the rate of decline of option’s time-value resulting from the passage of time (TIME DECAY).

Theta is typically highest for ATM options, and is progressively lower as options are ITM and OTM.
This makes sense because ATM options have the highest time value component, so they have more time value to lose over time than an ITM or OTM option.

4) Option Greeks: VEGA
Vega is a measure the sensitivity of an option’s price to changes in Implied Volatility (IV).

Vega is highest for ATM options, and is gradually lower as options are ITM and OTM.This means that the when there is a change in volatility, the value of ATM options will change the most. This makes sense because ATM options have the highest time value component, and changes in Implied Volatility would only affect the time value portion of an option’s price.




For more detailed discussion, please refer to the following post:
Option Greeks

Related Posts:
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* FREE Trading Videos from Famous Trading Gurus

Read More