Furthermore, she realizes that her outlook may be wrong: Johnson &
Johnson may decline. She may have to close the position early—maybe for
a profit, maybe for a loss. Stacie also needs to study her greeks. Exhibit 5.5
shows the greeks for this trade.
EXHIBIT 5.5 Greeks for short Johnson & Johnson 65 put (per contract).
Delta 0.65
Gamma−0.15
Theta 0.02
Vega −0.07
The first item to note is the delta. This position has a directional bias. This
bias can work for or against her. With a positive 0.65 delta per contract, this
position has a directional sensitivity equivalent to being long around 650
shares of the stock. That’s the delta × 100 shares × 10 contracts.
Stacie’s trade is not just a bullish version of Brendan’s. Partly because of
the size of the delta, it’s different—specific directional bias aside. First, she
will handle her trade differently if it is profitable.
For example, if over the next week or so Johnson & Johnson rises $1,
positive delta and negative gamma will have a net favorable effect on
Stacie’s profitability. Theta is small in comparison and won’t have too much
of an effect. Delta/gamma will account for a decrease in the put’s
theoretical value of about $0.73. That’s the estimated average delta times
the stock move, or [0.65 + (–0.15/2)] × 1.00.
Stacie’s actual profit would likely be less than 0.73 because of the bid-ask
spread. Stacie must account for the fact that the bid-ask is 0.05 wide (1.75–
1.80). Because Stacie would buy to close this position, she should consider
the 0.73 price change relative to the 1.80 offer, not the 1.75 trade price—
that is, she factors in a nickel of slippage. Thus, she calculates, that the puts
will be offered at 1.07 (that’s 1.80 − 0.73) when the stock is at $65. That is
a gain of $0.68.
In this scenario, Stacie should consider the Would I Do It Now? rule to
guide her decision as to whether to take her profit early or hold the position
until expiration. Is she happy being short ten 65 puts at 1.07 with Johnson
& Johnson at $65? The premium is lower now. The anticipated move has
already occurred, and she still has 28 days left in the option that could allow