Ok, After searching whole day and reading different articles, I understood below. Hope it will help to newbie in options like me and expert can correct me if anything is wrong,
Below description is for CALLs, for PUT consider vice versa true.
- Delta - It is important factor to decide/increase the option's premium value. i.e. if underlying stock increases or decreases by 1 rupees then how much option premium will increase/decrease. Greater delta value is better for calls. Delta is dynamic. It increases as contract approaches date.
- Gamma - Gamma is amount by which delta will increase. Greater the Gamma better for Delta.
- Theta - Theta is very important factor. It is time decay. It denotes how option's premium value decreases by each day approaches to last day of contract. Lesser the Theta better for call option's premium value.
- Vega (Volatility)- It denotes the volatility. Greater the volatility better for options premium value but remember greater volatility also brings increase in theta i.e. time decay.
There are many other factors (interest rate, etc.....) but I found these above are more important.
Example: TATAMOTORS present price is 384. I feel TATAMOTORS will cross 400 before August. So below is comparision,
FOR 390 strike price
Option Price : 11.68 (Fair value of the option)
Delta : 0.4756
Gamma : 0.0119
Vega (Volatility) : 0.4081
Theta : -0.2974
FOR 400 strike price
Option Price : 8.61 (Fair value of the option)
Delta : 0.3715
Gamma : 0.0107
Vega (Volatility) : 0.3875
Theta : -0.2901
So looking at above, for 400CE theta is slightly less than for 390CE. Also, delta for 390CE is more, so it's option premium value will increase faster than that of 400CE.
I hope my understanding is correct and it will help someone else. :thumb: