Introduction to Options
Options Greeks
Rho
Rho indicates the change in value of an option for 1 unit change in interest rate
Interest rates are almost constant over the expiry hence are considered insignificant
Introduction to Options
Options Greeks
Gamma
Gamma indicates how much the delta changes for a unit change in the price of the underlying
When delta change is known, then it becomes easy in finding how much the next premium change will be for a unit change in the spot price, I.e it indicates the rate of change in premium
Introduction to Options
Options Greeks
Gamma
Gamma = 0.01, Delta = 0.50, Spot = 100
Now when Spot increases to 101, the new delta will be 0.50 + 0.01 = 0.51
Rate of change in the premium has increased
Introduction to Options
Options Greeks
Gamma
Gamma is positive for option buyers and negative for option sellers
Gamma is unimportant for long maturity options
For short maturity options gamma is high and option premium changes fast with spot changes
Introduction to Options
Corporate Announcements
In case of a corporate announcement the exchange adjusts the option positions, so that the contract value of the positions on the cum benefit day and the ex benefit day is the same
Introduction to Options
Corporate Announcements - Dividend
As per SEBI, if the value of dividend declared is more than 10% of the spot price on the dividend announcement day, then on ex dividend date the strike price of the options is reduced by the dividend amount
If the dividend declared is lower than 10% of spot, then there is no adjustment. Market adjusts option price considering dividend
Introduction to Options
Corporate Announcements - Bonus
When a company declares bonus then the lot size and strike price of the stock option is adjusted by the exchange as per the bonus ratio on ex bonus day
Introduction to Options
Early exercise of options
Early exercise of Call Options on non dividend paying stock is never optimal because:
- Interest earnings
- Stock price less than strike price on expiry
(both applicable in case of delivery settlement)
- Beneficial if sold in the market to earn the time value
Introduction to Options
Early exercise of options
It is optimal to exercise Call Options on dividend paying stock
On ex dividend day the stock price falls by the amount of dividend
Fall in the stock price on ex dividend day makes the call option less attractive
Introduction to Options
Early exercise of options
Early exercise of deep in the money Put Options is optimal on non dividend paying stock:
- Interest earnings
- Beneficial if sold in the market to earn the time value only if the interest earned from today to expiration upon the exercise exceeds the time value
Introduction to Options
Early exercise of options
It is optimal to exercise Put Options on dividend paying stock just after the stock goes ex dividend
On ex dividend day the stock price falls by the amount of dividend
Fall in the stock price on ex dividend day makes the Put option more attractive
Options Greeks
Rho
Rho indicates the change in value of an option for 1 unit change in interest rate
Interest rates are almost constant over the expiry hence are considered insignificant
Introduction to Options
Options Greeks
Gamma
Gamma indicates how much the delta changes for a unit change in the price of the underlying
When delta change is known, then it becomes easy in finding how much the next premium change will be for a unit change in the spot price, I.e it indicates the rate of change in premium
Introduction to Options
Options Greeks
Gamma
Gamma = 0.01, Delta = 0.50, Spot = 100
Now when Spot increases to 101, the new delta will be 0.50 + 0.01 = 0.51
Rate of change in the premium has increased
Introduction to Options
Options Greeks
Gamma
Gamma is positive for option buyers and negative for option sellers
Gamma is unimportant for long maturity options
For short maturity options gamma is high and option premium changes fast with spot changes
Introduction to Options
Corporate Announcements
In case of a corporate announcement the exchange adjusts the option positions, so that the contract value of the positions on the cum benefit day and the ex benefit day is the same
Introduction to Options
Corporate Announcements - Dividend
As per SEBI, if the value of dividend declared is more than 10% of the spot price on the dividend announcement day, then on ex dividend date the strike price of the options is reduced by the dividend amount
If the dividend declared is lower than 10% of spot, then there is no adjustment. Market adjusts option price considering dividend
Introduction to Options
Corporate Announcements - Bonus
When a company declares bonus then the lot size and strike price of the stock option is adjusted by the exchange as per the bonus ratio on ex bonus day
Introduction to Options
Early exercise of options
Early exercise of Call Options on non dividend paying stock is never optimal because:
- Interest earnings
- Stock price less than strike price on expiry
(both applicable in case of delivery settlement)
- Beneficial if sold in the market to earn the time value
Introduction to Options
Early exercise of options
It is optimal to exercise Call Options on dividend paying stock
On ex dividend day the stock price falls by the amount of dividend
Fall in the stock price on ex dividend day makes the call option less attractive
Introduction to Options
Early exercise of options
Early exercise of deep in the money Put Options is optimal on non dividend paying stock:
- Interest earnings
- Beneficial if sold in the market to earn the time value only if the interest earned from today to expiration upon the exercise exceeds the time value
Introduction to Options
Early exercise of options
It is optimal to exercise Put Options on dividend paying stock just after the stock goes ex dividend
On ex dividend day the stock price falls by the amount of dividend
Fall in the stock price on ex dividend day makes the Put option more attractive