19 lines
1.3 KiB
Plaintext
19 lines
1.3 KiB
Plaintext
Delta
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Some of Kim’s risks warrant more concern than others. With this position,
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delta is of the greatest concern, followed by theta. Kim expects the call to
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rise in value and accepts the risk of decline. Delta exposure was her main
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rationale for establishing the position. She expects to hold it for about three
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weeks. Kim is willing to accept the trade-off of delta exposure for theta,
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which will cost her three weeks of erosion of option premium. If the
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anticipated delta move happens sooner than expected, Kim will have less
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decay. Exhibit 4.3 shows the value of her 35 call at various stock prices
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over time. The left column is the price of Disney. The top row is the number
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of days until expiration.
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EXHIBIT 4.3 Disney 35 call price–time matrix–value.
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The effect of delta is evident as the stock rises or falls. When the position
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is established (44 days until expiration), the change in the option price if the
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stock were to move from $35 to $36 is 0.62 (1.66 − 1.04). Between stock
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prices of $36 and $37, the option gains 0.78 (2.44 −1.66). If the stock were
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to decline in value from $35 to $34, the option loses 0.47 (1.04 − 0.57). The
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option gains value at a faster rate as the stock rises and loses value at a
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slower rate as the stock falls. This is the effect of gamma. |