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Here's how traders can use delta and gamma for options trading

Option Greeks are basically about sensitivities. We are familiar with the Black and Scholes formula to calculate the value of the option. But then a trader is more worried about sensitivities. These Option Greeks measure how the option value is vulnerable to changes in various variables like the market price, interest rates, volatility, time to expiry etc. Two very important and closely related Greeks are Delta and Gamma. Let us look at them in greater detail.

Option delta measures the sensitivity of the price of an option (intrinsic value) to the changes in the market price of the underlying. For example, if we are looking at a Reliance 1,250 call option expiring on the last Thursday of March 2019 then delta will measure how the option price of this particular contract moves with respect to changes in the price of Reliance spot. An option delta of a call option will vary from 0 to 1 while the option delta of a put option will vary from 0 to -1. Generally, the delta is the highest for an in-the-money call option and it will be close to 1 while it will be closer to 0 in case of out-of-the-money call option. Effectively, call options will have a positive delta while put options will have a negative delta.

Different traders use different scales for measuring option delta. While some use a scale of 0 to 1, others use a scale of 0-100. So a delta value of 0.60 will be equivalent to 60 in the other scale, but the underlying concept remains the same. What does a delta of 0.60 really mean? It shows the sensitivity of the price of the option to shifts in the price of the underlying. If the RIL stock moves up by Rs.20 then the price of the call option with a delta of 0.6 will move up by Rs 12. Similarly, the price of a put option with Delta of -0.60 will move lower by Rs 12 since put options are negatively related to the stock price.
**What traders must necessarily about the Option Delta**

- Delta can also be seen as the probability of the option expiring in the money (ITM). Which is why an ATM option has delta of around 0.5 (50-50 chance), deep ITM options have delta closer to 1 and deep OTM options have delta closer to 0.

- Delta is positive for call options and negative for put options. That is because a rise in price of the stock is positive for call options but negative for put options. A positive delta means that you are long on the market and a negative delta means that you are short on the market.

- Delta keeps changing over a period of time. Delta depends on factors like volatility, interest rates and time to maturity

- Since the delta is 0.4, the call option price will move up by 0.4 x (30) {Delta times change in the price of the underlying}. Thus the 870 call option price will move up by Rs.12 from Rs.18 to Rs.30.

- What happens to the delta? The delta will move up by the extent of the gamma in the above case. That is because the gamma measures the sensitivity of the delta to shifts in the stock price.

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**Disclaimer: The above opinion is that of Mr. Sneha Seth (Derivatives Analyst- Angel Broking) & is for reference only. **