18 lines
1.2 KiB
Plaintext
18 lines
1.2 KiB
Plaintext
precarious. His negative delta increases. His negative gamma increases. His
|
||
goal becomes more out of reach. In conjunction with delta and gamma,
|
||
theta helps Brendan decide whether the risk is worth the reward.
|
||
In the new scenario, with the stock at $64.50, Brendan would collect $18
|
||
a day (1.80 × 10 contracts). Is the risk of loss in the short run worth earning
|
||
$18 a day? With Johnson & Johnson at $64.50, would Brendan now short
|
||
10 calls at 0.75 to collect $18 a day, knowing that each day may bring a
|
||
continued move higher in the stock? The answer to this question depends on
|
||
Brendan’s assessment of the risk of the underlying continuing its ascent. As
|
||
time passes, if the stock remains closer to the strike, the daily theta rises,
|
||
providing more reward. Brendan must consider that as theta—the reward—
|
||
rises, so does gamma: a risk factor.
|
||
A small but noteworthy risk is that implied volatility could rise. The
|
||
negative vega of this position would, then, adversely affect the profitability
|
||
of this trade. It will make Brendan’s 1.10 cover-point approach faster
|
||
because it makes the option more expensive. Vega is likely to be of less
|
||
consequence because it would ultimately take the stock’s rising though the
|
||
strike price for the trade to be a loser at expiration. |