19 lines
1.3 KiB
Plaintext
19 lines
1.3 KiB
Plaintext
But just looking at delta only tells a part of the story. In reality, the delta
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does not remain constant during the price rise in Johnson & Johnson but
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instead becomes more negative. Initially, the delta is −0.34 and the gamma
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is −0.15. After a rise in the stock price, the delta will be more negative by
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the amount of the gamma. To account for the entire effect of direction,
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Brendan needs to take both delta and gamma into account. He needs to
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estimate the average delta based on gamma during the stock price move.
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The formula for the change in stock price is
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Taking into account the effect of gamma as well as delta, Johnson &
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Johnson needs to rise only $1.01, in order for Brendan’s calls to be offered
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at his stop-loss price of 1.10.
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While having a predefined price point to cover in the event the underlying
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rises is important, sometimes traders need to think on their feet. If material
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news is announced that changes the fundamental outlook for the stock,
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Brendan will have to adjust his plan. If the news leads Brendan to become
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bullish on the stock, he should exit the trade at once, taking a small loss
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now instead of the bigger loss he would expect later. If the trader is
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uncertain as to whether to hold or close the position, the Would I Do It
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Now? rule is a useful rule of thumb. |