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