Let me attempt to address them in as simple was as I can..
Delta = Amount of Change in Premium for 1 Rs. change in Nifty. So delta = +0.4 means the option price will change by 40 paise for each 1 point move of nifty.
Calls have +ive delta i.e. call premium increases by increase in nifty. Puts hace -ive delta.. cuase their premium drops as market goes up..
ATM options have delta = 0.5
ITM options have delta > 0.5, Far deep ITM option have delta approaching towards 1..
OTM option have delta < 0.5. Far OTM options have delta near 0.
As option gets more and more ITM, its delta will start increasing..
Gamma = Show the spead of change in delta.. To keep it simple. Just forget about it for the time being. Generally its value is like 0.001xx .. i.e. 1/1000 of a Rs.
shall I really care of 1 paise change.. and overload my mind.. ? (Maybe u can go those details later. Just understand the way Delta changes as described above, and u get a decent ground).
Theta = Rate of premium decay for each passing day of options life.
So if theta is 3, means, on each passing day, option premium will change by 3 rs.
For long position, theta works -ively.. and for short position theta is +ive.
As we approach towards expiry, the time premium eventuly goes toward 0. Theta shows us at what speed it will go towards 0.
Again to keep it simple. Calculate the time premium that u are paying in the option.. and divide that by days left.
Option premium has 2 parts = intrinsic value or real value and time value or value of air around that option.
eg = mkt at 4535, 4500 call option is trading at 64 rs. So the intrinsic value = 4535 - 4500 = 35 rs.
Whatever u pay beyond real value is time value i.e 64- 35 = 29 rs.
So if remainig life is 10 days.. i.e. roughly u will loose 29/10 = 2.9rs everyday.
Ideally timedecay follows expontial curve.. but using above calculation , we will follow linear curve.. doesn't make much difference..in trading.. but makes differnece if you are plannig to do research
Vega = Reflects the impact on premium due to change in underlying volatilty. Sounds great.. but complicate to calcualate.. so let me try to make it simple..
When expected voliatity in remainging life of option is high, then option seller wants more money.. so premium goes up. Option premium depends on what is gong to come (i.e. right side of the chart)
not the left side.. hence lets use our judgement to find if mkt is going to go thru big swings in next few days or not. (election result, economic news, company result etc are typical events that result in higher volatity).. In such scenario.. the time value calculated above will go up.. so the 64 rs option might start going for 80 rs.. i.e u are paying 80-35 = 45 rs for remain 10days of time.
that gives us theta of 45/10 = 4.5 rs.
So if you just practice above simple calculations.. without going into the complexity of vega, u can find out if option is fairly price (i.e u are paying decent money for per day of time). or it is
exorbitantly high money that option write is asking from you.
With practice, u can find out the typical time premium / day.
Volatility is important concept in option but it gets reflected in time premium. So to keep it simple, just focus on time premium and understand it as best as possible.
Rho = forget it.. Doesn't make much difference.. cause it has minimum effect on pricing. And Interst rate don't change everyday..
To summarize, just understand Delta and Theta first / their movement with respect to ITM/OTM/ATM..
Then look at Gamma / Vega / Rho (when u have time....)
Hope I am able to keep it simple. (There is fair bit of approximation which is used here.. so what, whatever model u use and get the price, real market price of option can still be different form that. So
as a trader, we need to live in reality and use the pricing concept to understand what is going on.. and what shd be our trading decision / which strategy should fit well etc.)
If you understand above concepts, then u will know that there are time when buying option is wrong (low volatility ahead) and there are time when selling option is wrong (high volalitility ahead)..
Any question / doubt.. feel free to fire here..
Happy Trading