Long ITM Call
Kim also has the alternative to buy an ITM call. Instead of the 35 or 37.50
call, she can buy the 32.50. The 32.50 call shares some of the advantages
the 37.50 call has over the 35 call, but its overall greek characteristics make
it a very different trade from the two previous alternatives. Exhibit 4.10
shows a comparison of the greeks of the three different calls.
EXHIBIT 4.10 Greeks for Disney 32.50, 35, and 37.50 calls.
Like the 37.50 call, the 32.50 has a lower gamma, theta, and vega than the
ATM 35-strike call. Because the call is ITM, it has a higher delta: 0.862. In
this example, Kim can buy the 32.50 call for 3. That’s 0.40 over parity (3 −
[35.10 − 32.50] = 0.40). There is not much time value, but more than the
37.50 call has. Thus, theta is of some concern. Ultimately, the ITMs have
0.40 of time value to lose compared with the 0.20 of the OTM calls. Vega is
also of some concern, but not as much as in the other alternatives because
the vega of the 32.50 is lower than the 35s or the 37.50s. Gamma doesn’t
help much as the stock rallies—it will get smaller as the stock price rises.
Gamma will, however, slow losses somewhat if the stock declines by
decreasing delta at an increasing rate.
In this case, the greek of greatest consequence is delta—it is a more
purely directional play than the other alternatives discussed. Exhibit 4.11
shows the matrix of the delta of the 32.50 call.
EXHIBIT 4.11 Disney 32.50 call price–time matrix–delta.