19 lines
1.1 KiB
Plaintext
19 lines
1.1 KiB
Plaintext
Day One
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The first day proves to be fairly volatile. The stock rallies from $40 to $42
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early in the day. This creates a positive position delta of 5.60, or the
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equivalent of being long about 560 shares. At $42, Harry covers the
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position delta by selling 560 shares of the underlying stock to become delta
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neutral again.
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Later in the day, the market reverses, and the stock drops back down to
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$40 a share. At this point, the position is short 5.60 deltas. Harry again
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adjusts the position, buying 560 shares to get flat. The stock then closes
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right at $40.
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The net result of these two stock transactions is a gain of $1,070. How?
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The gamma scalp minus the theta, as shown below.
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The volatility of day one led to it being a profitable day. Harry scalped 560
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shares for a $2 profit, resulting from volatility in the stock. If the stock
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hadn’t moved as much, the delta would have been smaller, and the dollar
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amount scalped would have been smaller, leading to an exponentially
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smaller profit. If there had been more volatility, profits would have been
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exponentially larger. It would have led to a bigger bite being taken out of
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the market. |