33 lines
2.5 KiB
Plaintext
33 lines
2.5 KiB
Plaintext
485
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AN INTrOduCTION TO OPTIONS ON FuTureS
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until expiration, estimated volatility, and interest rates. For any given set of values for these factors,
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delta will equal the absolute difference between the option premium indicated by the model and the
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model-indicated premium if the futures price changes by one point. Table 34.3 illustrates a number
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of important observations regarding theoretical delta values:
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1. Delta values for out-of-the-money options are low. This relationship is a result of the
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fact that there is a high probability that any given price increase
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9 will not make any actual differ-
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ence to the value of the option at expiration (i.e., the option will probably expire worthless).
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2. Delta values for in-the-money options are relatively high, but less than one. In-
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the-money options have high deltas because there is a high probability that a one-point change
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in the futures price will mean a one-point change in the option value at expiration. However,
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since this probability must always be equal to less than one, the delta value will also always be
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equal to less than one.
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3. Delta values for at-the-money options will be near 0.50. Since there is a 50/50 chance
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that an at-the-money option will expire in-the-money, there will be an approximately 50/50
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chance that a one-point increase in the price of futures will result in a one-point increase in the
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option value at expiration.
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4. Delta values for out-of-the-money options will increase as time to expiration
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increases. A longer time to expiration will increase the probability that a price increase in
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futures will make a difference in the option value at expiration, since there is more time for
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futures to reach the strike price.
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5. Delta values for in-the-money options will decrease as time to expiration
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increases. A longer time to expiration will increase the probability that a change in the futures
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price will not make any difference to the option value at expiration since there is more time for
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futures to fall back to the strike price by the time the option expires.
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6. Delta values for at-the-money options are not substantially affected by time to
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maturity until near expiration. This behavioral pattern is true because the probability that
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an at-the-money option will expire in-the-money remains close to 50/50 until the option is
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near expiration.
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9 This section implicitly assumes that the option is a call. If the option is a put, read “price decrease” for all refer-
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ences to “price increase.” |