32 lines
1.9 KiB
Plaintext
32 lines
1.9 KiB
Plaintext
Delta −0.34
|
||
Gamma−0.15
|
||
Theta 0.02
|
||
Vega −0.07
|
||
The short call has a negative delta. It also has negative gamma and vega,
|
||
but it has positive time decay (theta). As Johnson & Johnson ticks higher,
|
||
the delta increases the nominal value of the call. Although this is not a
|
||
directional trade per se, delta is a crucial element. It will have a big impact
|
||
on Brendan’s expectations as to how high the stock can rise before he must
|
||
take his loss.
|
||
First, Brendan considers how much the option price can move before he
|
||
covers. The market now is 0.66 bid at 0.68 offer. To buy back his calls at
|
||
1.10, they must be offered at 1.10. The difference between the offer now
|
||
and the offer price at which Brendan will cover is 0.42 (that’s 1.10 − 0.68).
|
||
Brendan can use delta to convert the change in the ask prices into a stock
|
||
price change. To do so, Brendan divides the change in the option price by
|
||
the delta.
|
||
The −0.34 delta indicates that if JNJ rises $1.24, the calls should be
|
||
offered at 1.10.
|
||
Brendan takes note that the bid-ask spreads are typically 0.01 to 0.03
|
||
wide in near-term Johnson & Johnson options trading under 1.00. This is
|
||
not necessarily the case in other option classes. Less liquid names have
|
||
wider spreads. If the spreads were wider, Brendan would have more
|
||
slippage. Slippage is the difference between the assumed trade price and the
|
||
actual price of the fill as a product of the bid-ask spread. It’s the difference
|
||
between theory and reality. If the bid-ask spread had a typical width of, say,
|
||
0.70, the market would be something more like 0.40 bid at 1.10 offer. In
|
||
this case, if the stock moved even a few cents higher, Brendan could not
|
||
buy his calls back at his targeted exit price of 1.10. The tighter markets
|
||
provide lower transaction costs in the form of lower slippage. Therefore,
|
||
there is more leeway if the stock moves adversely when there are tighter
|
||
bid-ask option spreads. |