Long ATM Put
The beauty of the free market is that two people can study all the available
information on the same stock and come up with completely different
outlooks. First of all, this provides for entertaining television on the
business-news channels when the network juxtaposes an outspoken bullish
analyst with an equally unreserved bearish analyst. But differing opinions
also make for a robust marketplace. Differing opinions are the oil that
greases the machine that is price discovery. From a market standpoint, it’s
what makes the world go round.
It is possible that there is another trader, Mick, in the market studying
Disney, who arrives at the conclusion that the stock is overpriced. Mick
believes the stock will decline in price over the next three weeks. He
decides to buy one Disney March 35 put at 0.80. In this example, March has
44 days to expiration.
Mick initiates this long put position to gain downside exposure, but along
with his bearish position comes option-specific risk and opportunity. Mick
is buying the same month and strike option as Kim did in the first example
of this chapter: the March 35 strike. Despite the different directional bias,
Mick’s position and Kim’s position share many similarities. Exhibit 4.13
offers a comparison of the greeks of the Disney March 35 call and the
Disney March 35 put.
EXHIBIT 4.13 Greeks for Disney 35 call and 35 put.
Call Put
Delta 0.57 −0.444
Gamma0.1660.174
Theta −0.013−0.009
Vega 0.0480.048
Rho 0.023−0.015
The first comparison to note is the contrasting deltas. The put delta is
negative, in contrast to the call delta. The absolute value of the put delta is
close to 1.00 minus the call delta. The put is just slightly OTM, so its delta