First-order Greeks are in blue, second-order Greeks are in green, and third-order Greeks are in yellow. The Greeks sum of the parts analysis investopedia forex vital tools in risk management.
Scholes model are relatively easy to calculate, a desirable property of financial models, and are very useful for derivatives traders, especially those who seek to hedge their portfolios from adverse changes in market conditions. The most common of the Greeks are the first order derivatives: delta, vega, theta and rho as well as gamma, a second-order derivative of the value function. For a vanilla option, delta will be a number between 0. For example, if a portfolio of 100 American call options on XYZ each have a delta of 0. Since the delta of underlying asset is always 1. Delta is close to, but not identical with, the percent moneyness of an option, i.
If the value of delta for an option is known, one can calculate the value of the delta of the option of the same strike price, underlying and maturity but opposite right by subtracting 1 from a known call delta or adding 1 to a known put delta. For example, if the delta of a call is 0. 42 then one can compute the delta of the corresponding put at the same strike price by 0. 58 and add 1 to get 0. Vega is the derivative of the option value with respect to the volatility of the underlying asset. Vega is not the name of any Greek letter.
Presumably the name vega was adopted because the Greek letter nu looked like a Latin vee, and vega was derived from vee by analogy with how beta, eta, and theta are pronounced in American English. Another possibility is that it is named after Joseph De La Vega, famous for Confusion of Confusions, a book about stock markets and which discusses trading operations that were complex, involving both options and forward trades. Vega can be an important Greek to monitor for an option trader, especially in volatile markets, since the value of some option strategies can be particularly sensitive to changes in volatility. The value of an option straddle, for example, is extremely dependent on changes to volatility. By convention, it is usual to divide the result by the number of days in a year, to arrive at the amount an option’s price will drop, in relation to the underlying stock’s price.