19 lines
1.1 KiB
Plaintext
19 lines
1.1 KiB
Plaintext
Long ATM Call
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Kim is a trader who is bullish on the Walt Disney Company (DIS) over the
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short term. The time horizon of her forecast is three weeks. Instead of
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buying 100 shares of Disney at $35.10 per share, Kim decides to buy one
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Disney March 35 call at $1.10. In this example, March options have 44
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days until expiration. How can Kim profit from this position? How can she
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lose?
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Exhibit 4.1 shows the profit and loss (P&(L)) for the call at different time
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periods. The top line is when the trade is executed; the middle, dotted line is
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after three weeks have passed; and the bottom, darker line is at expiration.
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Kim wants Disney to rise in price, which is evident by looking at the graph
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for any of the three time horizons. She would anticipate a loss if the stock
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price declines. These expectations are related to the position’s delta, but that
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is not the only risk exposure Kim has. As indicated by the three different
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lines in Exhibit 4.1 , the call loses value over time. This is called theta risk .
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She has other risk exposure as well. Exhibit 4.2 lists the greeks for the DIS
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March 35 call.
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EXHIBIT 4.1 P&(L) of Disney 35 call.
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EXHIBIT 4.2 Greeks for 35 Disney call. |