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Black’s Greeks
21
Jun
Black’s Greeks

Hi! Great news for options traders. We have added Greeks to the Option Board in our trading platform, and we calculate them ourselves according to the Black's model using the most preferable set of parameters. Apparently, even Black would enjoy our renewed Option Board :)

—  What exactly did you add?

Primarily, we have added implied volatility and all major Greeks to the Options Board. The implied volatility (IV) is measured in percent and displayed as a histogram:

                     

We also calculate delta, which is a measure of the change in an option's price resulting from a change in the underlying asset, and gamma, delta's rate of change.

—  What about other Greeks?

That’s not all, of course. We have also added theta that measures the rate of decline of premium resulting from the passage of time. We calculate theta for each day in price points. The last indicator added this time is vega; it quantifies risk exposure to implied volatility changes. It’s calculated in price points per one percentage point of IV change.

—  How to examine them?

That’s easy. Open the Option Board, click on the small icon in the right-upper corner of the table and choose the indicators you need: they will instantly be added to your table.

          

—  Can you explain how exactly I can use these data?

No problem! Let’s study an example: we’ll take options on WTI oil expiring in December 2016 (LO.NYMEX.Z2016.) 

          

We will examine strike 4.850, Put option. Generally, you can use this table to learn how to interpret Greeks:

Parameter

Units

Underlying measure

Example

Delta

Point

1 point of change in the underlying asset price

Delta = - 0.38: when the price of the underlying asset increases by 1 pips, the option price will decrease by 0.38 pips

Vega

Point

1 percentage point of IV change

Vega = 0.09: if IV changes by 1 percentage point, the option price will change by 0.09 points

Theta

Point

1 day

Theta = - 0.02: the option price will be decreasing by 0.02 points per day

Gamma

Delta fraction

1 point of change in the underlying asset price

Gamma = 0.0388: when the underlying asset price changes by 1 pips, delta changes by 0.0388 points

—  Okay, now it’s clear how to interpret them. Let’s, however, go a step back: how do you calculate Greeks?

The Greeks are calculated based on the generalized Black model (Wiki) individually for each strike. We stick to the following rules:

  • The implied volatility is calculated for only out-of-the-money options based on the average quote between bid and ask;
  • To calculate the time to option expiration we use calendar dates with the accuracy of one second;
  • The risk-free rate is calculated based on the average box spreads for those SPX options with such expiration dates that allow defining the market price using bid and ask due to sufficient liquidity;
  • The rate for unrepresentative expirations is extrapolated cubically.

We use the underlying asset’s forward price calculated based on put-call parity. This way we can take account of the expected dividends without using the dividend yield forecasts provided by third parties. This allows us to make more precise estimates.

At the moment IV and Greeks are calculated only within a trading session for options with underlying assets denominated in dollars and euros. In the coming weeks the list will be expanded by ruble options.

— Nice job! How much will it cost me to use your Option Board?

That’s absolutely free! All these indicators are available in the demo mode. You can use it for free during an unrestricted period of time: just install it and enjoy. If you decide to use the live mode, we will never charge any periodic service fees or whatever: you will only pay for trades.

— Where can I try this Option Board?

Her is the link to download our trading platform: https://exante.eu/clientsarea/account/downloads/. Register first if you have not one it before: it will take only a minute, and you will only need to enter your phone number and specify your password to work with a demo account. If you have any questions, please contact support@exante.eu, and we will answer within 2 minutes.

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