Option Greeks and implied volatility
Delta, gamma, theta, vega and IV: what moves an option's price, and why an option can lose value even when you are right about direction.
1. Why Greeks matter
An option's price depends on five things: the underlying price, the strike, time to expiry, interest rates and volatility. The Greeks measure how much the premium changes when one of them moves and the rest stay still.
They come from an option pricing model, usually Black-Scholes. The model is a simplification, but the Greeks it produces are the common language of options traders.
2. Delta and gamma
Delta is how much the premium moves for a 1-point move in the underlying. Calls have delta from 0 to 1; puts from 0 to −1.
- ATM options have delta near 0.5 (or −0.5).
- Deep ITM options approach 1 (or −1) and move almost point for point with the index.
- Far OTM options have delta near 0 and barely react to small moves.
- Delta is also a rough estimate of the probability that the option expires in the money.
Gamma is how fast delta itself changes. Gamma is highest for ATM options close to expiry, which is why expiry-day premiums can explode or collapse within minutes.
3. Theta: time decay
Theta is how much premium an option loses per day if nothing else changes. It is negative for buyers and positive for sellers.
Decay is not linear. It speeds up as expiry approaches, and it is largest in rupee terms for ATM options.
If you buy an option, you need the move to come soon enough to beat theta. If you sell one, theta works for you, but gamma risk grows as expiry nears.
4. Vega and implied volatility
Implied volatility (IV) is the volatility the market is pricing into an option. Higher IV means more expensive options.
Vega is how much the premium changes for a 1 percentage-point change in IV. Longer-dated and ATM options have the most vega.
- IV usually rises before known events (results, budgets, policy decisions) and drops sharply afterwards. This is the IV crush.
- India VIX is a measure of expected Nifty volatility built from Nifty option prices. When VIX jumps, option premiums across strikes rise.
- The IV smile: OTM puts and calls often carry higher IV than ATM options, because traders pay up for protection against large moves.
An option buyer can be right on direction and still lose if IV falls enough. That is vega at work.
5. Using Greeks together
| Position | Delta | Gamma | Theta | Vega |
|---|---|---|---|---|
| Long call | + | + | − | + |
| Long put | − | + | − | + |
| Short call | − | − | + | − |
| Short put | + | − | + | − |
| Long straddle | ≈ 0 | + | − | + |
| Short strangle | ≈ 0 | − | + | − |
Add up the Greeks of every leg to see the risk of a whole strategy. A strategy with near-zero delta is not riskless; it has simply swapped direction risk for gamma, theta and vega risk.
Key takeaways
- Delta: price sensitivity. Gamma: how fast delta changes, highest near expiry at the money.
- Theta: daily time decay, working against buyers and for sellers.
- Vega and IV: options get cheaper when IV falls, even if price moves your way.
- Sum the Greeks across legs to understand a strategy's real risks.
Try it on ExpertView: Price an option and see its Greeks →
From ExpertView's free courses at expertview.in/learn. For study and educational use. Not investment advice. Rules, lot sizes, taxes and timings change; check the latest from NSE, MCX, SEBI and the Income Tax Department.