34 lines
2.0 KiB
Plaintext
34 lines
2.0 KiB
Plaintext
Chapter 40: Advanced Concepts 865
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options. The following table of option prices may help to demonstrate these rela
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tionships:
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Example: With XYZ at 49, the following options have the rho indicated (January is
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the near-term expiration):
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Month/Strike Call Rho Put Rho
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January 35 0.05 -0.01
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January 50 0.03 -0.03
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January 60 0.00 -0.05
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July 35 0.18 -0.02
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July 50 0.14 -0.15
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July 60 0.07 -0.18
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Note that the in-the-money calls (35 strike) have larger rho than the out-of-the
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money 60's, in both January and July. Similarly, the in-the-money puts (the 60's) have
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larger rho on an absolute basis than the out-of-the-money 35's. Again, this is true for
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both January and July.
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Furthermore, note that the longer-term July rhos are all larger (again as
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absolute numbers) than their shorter-term January counterparts.
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Rho can also be calculated for an entire portfolio to obtain a "position rho," sim
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ilar to previous examples. Generally, one would not be overly concerned with his
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position rho unless his portfolio contained quite a few long-term options and/or
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deeply in-the-money ones. Thus, rho is more important as a consideration when one
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is trading LEAPS or warrants, both of which may be extremely long-term vehicles.
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Of the risk measures discussed so far, rho is the least used, since many traders tend
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to have relatively short-term options in their positions.
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THE GA,\1MA OF THE GAMMA
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Occasionally, one may hear reference to the "six measures of risk." This is the sixth
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one and it is the most arcane. At any point, one knows the delta and gamma of an
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option. As the stock moves, the delta changes (by the amount of the gamma), but so
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does the gamma. Some traders are interested in knowing how much the gamma will
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change when the stock moves. Hence, they will compute the gamma of the gamma,
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which is the arrwunt by which the gamma will change when the stock price changes.
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This concept will be discussed at the end of this chapter. It is most important for
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strategists involved in positions on highly volatile stocks, for if the stock moves far |