Parameters affecting Delta ()

The effects of changes in the different parameters on the magnitude of delta are summarised in the table below.

Moneyness ( S ) Gamma and Speed Volatility ( ) Vanna Time to Expiration ( ) Charm

Second-Order Analysis: Second-Order Analysis: Second-Order Analysis:
The gamma of an option ( d1 )
S
is positive, The vanna of an option is (d1 ) d 2 . Since The charm of an option is ( d1 )
2 d2 2r .
implying that is an increasing function of (r 2 )
2
is usually small in practice, Since 2r and r 22 are usually small in

sgn d 2 sgn log KS most of the time. Hence practice, the sign of charm equals sgn log S
S . Hence further ITM options have higher
K
| | while further OTM options have lower
moves closer to ATM when rises, and most of the time. Hence with less time to
| |.
away from ATM when drops. expiration, moves further away from ATM.

Third-Order Analysis:

d1
The speed of an option is S
. From

this expression it can be derived that ATM

options have the greatest changes in | | ,
while changes in | | decreases as the option
moves further away from ATM.
 Parameters affecting Vega ( )
The effects of changes in the different parameters on vega are summarised in the table below.

Moneyness ( S ) Vanna Volatility ( ) Vomma Time to Expiration ( ) Veta

Second-Order Analysis: Second-Order Analysis: Second-Order Analysis:
(d ) S ( d1 )
The vanna of an option is 1 d 2 . Since The vomma of an option is d1d2 . The veta of an option is given by

(r 2 ) is usually small in practice, Approximating d1d 2 by log 2 KS , we get

2
S ( d1 )
2 2rd
1
(1 d1d 2 ) S2 ( d ) 1 log 2 KS 0 .
1

sgn d 2 sgn log KS most of the time. that vomma is positive most of the time Hence for all options, it is generally the case that

Hence the further away from ATM, the and zero when S K . Hence:
decreases with less time to expiration.

smaller the . ATM options: remains

relatively unaffected by changes
in
ITM and OTM options:
increases with increasing
 Parameters affecting Theta ()
The effects of changes in the different parameters on theta are summarised in the table below. (Note: Due to the complexity of the expression for
theta, only general results will be stated and the mathematical analysis will be forgone.)

Moneyness ( S ) Volatility ( ) Time to Expiration ( )

The further away from ATM, the slower the With higher volatility, the rate of time decay With less time remaining to expiration, the rate
rate of time decay. increases. of time decay for ATM options increases,
while the rate of time decay for deep ITM and
With more time remaining to expiration, the (NB: This can be derived by analysing the sign OTM decreases.
rate of time decay is generally lower and more of veta)
stable across all strike prices.

(NB: This can be derived by analysing the sign

of charm)
 Parameters affecting Gamma ()
The effects of changes in the different parameters on gamma are summarised in the table below.

Moneyness ( S ) Speed Volatility ( ) Zomma Time to Expiration ( ) Colour

Third-Order Analysis: Third-Order Analysis: Third-Order Analysis:
ATM options have highest , while The zomma of an option is
d1d2 1 which The colour of an option is given by
decreases as the option moves further away
is negative when log 2 KS 1 and positive
( d1 )
2 S 3/2 d 2 2 r

d1 1 ( d1 )
2 S 3/2
d1d 2 1 . With
from ATM (see section on Delta).
otherwise. Hence with rising , the of similar analysis to that on zomma, we see that
options moderately close to ATM decreases, as time remaining to expiration decreases, the
while that of options very far away from ATM of options moderately close to ATM
increases (slightly). increases, while that of options very far away
from ATM decreases.
In general, during high levels of volatility.
gamma tends to be lower and more stable
across all strike prices.
 Summary: Parameters Affecting Option Greeks
|| ||

Increase from 0 to 1 as
Moneyness option moves from Decrease as option moves away from ATM
OTM to ITM

Rising ITM, OTM: Increase *DITM, DOTM: Increase

Closer to ATM Increase
ATM: Unaffected Otherwise: Decrease
Volatility

Passage of *DITM, DOTM: Increase

Away from ATM Decrease
Time Otherwise: Decrease

* (Very) Deep In-The Money, Deep Out-Of-The-Money