Option greeks explained: delta, gamma, theta, and vega for Indian investors

Delta: how much the option moves with the underlying

Delta measures how much an option's price changes for every Rs. 1 change in the underlying's price. A call option with a delta of 0.5 rises by approximately Rs. 0.50 for every Rs. 1 rise in Nifty or the underlying stock. A put option has a negative delta: a put with delta -0.4 rises Rs. 0.40 for every Rs. 1 fall in the underlying.

Delta ranges from 0 to 1 for calls and -1 to 0 for puts. Deep in-the-money options have a delta near 1 (or -1) and behave almost like owning the underlying. Far out-of-the-money options have delta near zero and barely move. At-the-money options have a delta around 0.5. Delta also approximates the probability that an option will expire in the money: a delta of 0.7 implies roughly a 70 percent probability of in-the-money expiry.

Gamma: how fast delta changes

Gamma measures how much delta changes for every Rs. 1 change in the underlying. High gamma means delta is changing fast, making the position more sensitive as the underlying moves. Options near expiry and near the money have the highest gamma -- they are the most unstable in delta.

For buyers of options, high gamma is generally helpful: delta accelerates as the trade moves in your favour. For sellers of options (theta collectors), high gamma is the primary risk: a fast-moving market can cause delta to accelerate against you. Gamma risk intensifies on weekly expiry days when Nifty or BankNifty options approach the current index level -- this is why experienced traders are more cautious about short option positions on expiry mornings.

Theta: time decay that works against buyers

Theta measures how much an option loses in value for every passing day, all else being equal. An option with a theta of -10 loses approximately Rs. 10 in premium every day due to the passage of time alone. This time decay is why options are often described as wasting assets for buyers.

Theta accelerates as expiry approaches. Out-of-the-money options lose the most to time decay in the final week before expiry. Options sellers (who sell calls or puts) profit from theta: time passing and the option expiring worthless is the outcome they seek. Buyers need the underlying to move enough in the right direction to offset theta losses. A long option position that is directionally correct but slow to move can still be unprofitable if theta erodes more than delta gains.

Vega: sensitivity to implied volatility

Vega measures how much an option's price changes for every 1 percentage point change in implied volatility (IV). An option with a vega of 20 gains Rs. 20 in price if IV rises by 1 percentage point. Options are more expensive when implied volatility is high because market participants are paying more for uncertainty protection.

For Indian index options, India VIX is the key implied volatility indicator. When VIX spikes (during geopolitical events, Union Budget days, election results), options premiums inflate across the market. Buyers who purchased options before a VIX spike benefit from vega gains on top of any directional move. Sellers who sold options before a spike face vega losses -- their short positions are now worth more for the buyer to close. Understanding your vega exposure helps you anticipate how your options portfolio behaves before major scheduled events.

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