To calculate target, SL and entry, here at AOC we use an simplified version of Black-Scholes model. With the help of option greeks and Black-Scholes model we are able to estimate the value of LTP or the option premium.
Here’s a brief overview of the Greeks: #
- Delta (Δ): Measures the rate of change of the option price with respect to changes in the underlying asset’s price.
- Gamma (Γ): Measures the rate of change of delta with respect to changes in the underlying asset’s price (second derivative of the option price with respect to the underlying asset’s price).
- Theta (Θ): Measures the rate of change of the option price with respect to the passage of time (time decay).
These Greeks are used to estimate the change in the option’s premium based on small changes in the underlying asset’s price or the passage of time. The general formula for estimating the change in an option’s premium (ΔP) based on the Greeks is:
ΔP≈Δ*ΔS + 1/2*Γ*ΔS*ΔS + Θ*Δt
where:
- Δ is the delta of the option.
- ΔS is the change in the underlying asset’s price.
- Γ is the gamma of the option.
- Θ is the theta of the option.
- Δt is the change in time (in no. of days).
This formula provides an approximation of how the option’s premium will change given small changes in the underlying asset’s price and time. Final LTP = LTP+ΔP
Do I need to remember this? #
Absolutely not, AOC has ready made calculator, it provides and easy to use interface for calculation LTP premium with just a single click.
Here is how you can do that in AOC.
- Click on LTP of desired strike price for which you are willing to calculate LTP, call or put.
- Input your desired spot (or future price if you are willing to calculated based upon future price)
- Entry price is the estimated price when underlying reaches that level.
