22 lines
1.5 KiB
Plaintext
22 lines
1.5 KiB
Plaintext
Long ITM Call
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Kim also has the alternative to buy an ITM call. Instead of the 35 or 37.50
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call, she can buy the 32.50. The 32.50 call shares some of the advantages
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the 37.50 call has over the 35 call, but its overall greek characteristics make
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it a very different trade from the two previous alternatives. Exhibit 4.10
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shows a comparison of the greeks of the three different calls.
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EXHIBIT 4.10 Greeks for Disney 32.50, 35, and 37.50 calls.
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Like the 37.50 call, the 32.50 has a lower gamma, theta, and vega than the
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ATM 35-strike call. Because the call is ITM, it has a higher delta: 0.862. In
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this example, Kim can buy the 32.50 call for 3. That’s 0.40 over parity (3 −
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[35.10 − 32.50] = 0.40). There is not much time value, but more than the
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37.50 call has. Thus, theta is of some concern. Ultimately, the ITMs have
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0.40 of time value to lose compared with the 0.20 of the OTM calls. Vega is
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also of some concern, but not as much as in the other alternatives because
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the vega of the 32.50 is lower than the 35s or the 37.50s. Gamma doesn’t
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help much as the stock rallies—it will get smaller as the stock price rises.
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Gamma will, however, slow losses somewhat if the stock declines by
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decreasing delta at an increasing rate.
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In this case, the greek of greatest consequence is delta—it is a more
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purely directional play than the other alternatives discussed. Exhibit 4.11
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shows the matrix of the delta of the 32.50 call.
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EXHIBIT 4.11 Disney 32.50 call price–time matrix–delta. |