39 lines
3.1 KiB
Plaintext
39 lines
3.1 KiB
Plaintext
100 Part II: Call Option Strategies
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Example: The delta of a call option is close to 1 when the underlying stock is well
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above the striking price of the call. If XYZ were 60 and the XYZ July 50 call were
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101/s, the call would change in price by nearly 1 point ifXYZ moved by 1 point, either
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up or down. A deeply out-of-the-money call has a delta of nearly zero. If XYZ were
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40, the July 50 call might be selling at¼ of a point. The call would change very little
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in price if XYZ moved by one point, to either 41 or 39. When the stock is at the strik
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ing price, the delta is usually between one-half of a point and five-eighths of a point.
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Very long-term calls may have even larger at-the-money deltas. Thus, if XYZ were 50
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and the XYZ July 50 call were 5, the call might increase to 5½ if XYZ rose to 51 or
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decrease to 4½ if XYZ dropped to 49.
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Actually, the delta changes each time the underlying stock changes even frac
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tionally in price; it is an exact mathematical derivation that is presented in a later
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chapter. This is most easily seen by the fact that a deep in-the-money option has a
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delta of 1. However, if the stock should undergo a series of I-point drops down to the
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striking price, the delta will be more like½, certainly not 1 any longer. In reality, the
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delta changed instantaneously all during the price decline by the stock. For those
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who are geometrically inclined, the preceding option price curve is useful in deter
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mining a graphic representation of the delta. The delta is the slope of the tangent line
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to the price curve. Notice that a deeply in-the-money option lies to the upper right
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side of the curve, very nearly on the intrinsic value line, which has a slope of 1 above
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the strike. Similarly, a deeply out-of-the-money call lies to the left on the price curve,
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again near the intrinsic value line, which has a slope of zero below the strike.
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Since it is more common to relate the option's price change to a full point
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change in the underlying stock (rather than to deal in "instantaneous" price changes),
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the concepts of up delta and down delta arise. That is, if the underlying stock moves
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up by 1 full point, a call with a delta of .50 might increase by 5/s. However, should the
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stock fall by one full point, the call might decrease by only 3/s. There is a different net
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price change in the call when the stock moves up by 1 full point as opposed to when
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it falls by a point. The up delta is observed to be 5/s while the down delta is 3/s. In the
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true mathematical sense, there is only one delta and it measures "instantaneous"
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price change. The concepts of up delta and down delta are practical, rather than the
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oretical, concepts that merely illustrate the fact that the true delta changes whenev
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er the stock price changes, even by as little as 1 point. In the following examples and
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in later chapters, only one delta is referred to.
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The delta is an important piece of information for the call buyer because it can
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tell him how much of an increase or decrease he can expect for short-term moves by
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the underlying stock. This piece of information may help the buyer decide which call
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to buy. |