Exactly what does 50 cents buy Pete? The stock price sitting below the
strike price means a net positive delta. This long time spread also has
positive theta and vega. Gamma is negative. Exhibit 11.8 shows the
specifics.
EXHIBIT 11.8 10-lot Wal-Mart August–September 50 call calendar.
The delta of this trade, while positive, is relatively small with 39 days left
until August expiration. It’s not rational to expect a quick profit if the stock
advances faster than expected. But ultimately, a rise in stock price is the
goal. In this example, Wal-Mart needs to rise to $50, and timing is
everything. It needs to be at that price in 39 days. In the interim, a move too
big and too fast in either direction hurts the trade because of negative
gamma. Starting with Wal-Mart at $48.50, delta/gamma problems are worse
to the downside. Exhibit 11.9 shows the effects of stock price on delta,
gamma, and theta.
EXHIBIT 11.9 Stock price movement and greeks.