AlgoDevStudio
The Calculus of Profit: Option Greeks
Delta, Gamma, Theta, and Vega are not just letters. They are the dashboard of your risk.
Trading options without understanding Greeks is like flying a plane without an altimeter. For algorithmic traders, Greeks are the variables in the Black-Scholes equation that determine potential PnL. Here is the engineer's guide to the "Big Four."
1. Delta (Δ) - Directional Risk
The Speedometer
Definition: How much the option price changes for a 1-point move in the underlying asset.
- Call Delta: 0 to 1. (ATM ~0.5)
- Put Delta: -1 to 0. (ATM ~-0.5)
- Code Logic:
hedge_qty = portfolio_delta * -1
"If Nifty moves up 100 points, and your Call Delta is 0.6, your option gains ₹60."
2. Gamma (Γ) - Acceleration
The Accelerator
Definition: The rate of change of Delta itself. It measures convexity.
- Long Option: Positive Gamma (Profits accelerate as you are right).
- Short Option: Negative Gamma (Losses accelerate as you are wrong).
- Risk: High Gamma risk occurs near expiry (0DTE).
"Gamma is why hitting a homerun feels so good, and being short squeezed feels so deadly."
3. Theta (Θ) - Time Decay
The Silent Killer
Definition: How much value an option loses per day as expiry approaches.
- Decay Curve: Non-linear. Decay accelerates in the final 30 days.
- Strategy: Option Sellers farm Theta (positive theta). Buyers pay rent (negative theta).
4. Vega (ν) - Volatility
The Fear Index
Definition: Sensitivity to changes in Implied Volatility (IV).
- High Vega: Long term options (LEAPS).
- Crush: 'IV Crush' happens after earnings or news events, wiping out option buyers even if the price doesn't move.
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