Glossary
Options
An Option is a derivative contract in a securities market. It provides the buyer with the right but not the obligation to acquire or sell an asset at a fixed price during a given period.
Primarily, a risk management tool for institutional investors and market makers. For Oxeye, options can also provides insurance against unexpected market moves.
Put Options provide the buyer the right but not the obligation to sell the underlying asset to the seller of the option at a certain time and for a certain price.
Call Options provides the buyer the right but not the obligation to buy the underlying asset from the seller of the option at a certain time and for a for a certain price.
Option Premiums are determined by the following factors:
- Price of underlying ( the insured asset )
- Time until expiry ( the policy period )
- Market Volatility ( the risk of loss)
Due to the effect of theta on an option and the idea that most expire out of the money and therefore worthless an option is a 'wasting asset'.
Selling an option is sometimes referred to as 'writing' or 'shorting' an option.
Volatility is the degree to which the price of the underlying tends to fluctuate over time.
The Greeks
Delta
The delta conveys the value of an option changes with respect to any changes to the price of the underlying contract. Therefore, the value will increase if the underlying increases, and it will decrease if the underlying value decreases.
For example, an option with a delta of 100 will move up or down one full point for each full consecutive point move in the value of the underlying.
Gamma
The gamma measures the sensitivity of the Delta to any changes in the underlying. Meaning that the delta will increase by the amount of the gamma and decrease by the same amount of the gamma if it should fall.
Theta
The Theta measures the sensitivity of an options value to the change in time to expiration. Known as the time decay factor, the rate at which anoptions value will decrease as time passes.
For example, if the daily theta shows a measurement of –250 this indicates that the option value will decrease by .250.
The Theta measures the sensitivity of an options value to the change in time to expiration. Known as the time decay factor, the rate at which anoptions value will decrease as time passes.
For example, if the daily theta shows a measurement of –250 this indicates that the option value will decrease by .250.
Vega
The Vega measures the sensitivity of an options value to the change in volatility of the underlying.
For example, a vega of .090 indicates a change in the option value of .090 if the volatility increases by 1.0 and decrease by .090 if the volatility should fall by 1.0.