18 lines
1.2 KiB
Plaintext
18 lines
1.2 KiB
Plaintext
Effect of Time on Delta
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In a close contest, the last few minutes of a football game are often the most
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exciting—not because the players run faster or knock heads harder but
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because one strategic element of the game becomes more and more
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important: time. The team that’s in the lead wants the game clock to run
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down with no interruption to solidify its position. The team that’s losing
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uses its precious time-outs strategically. The more playing time left, the less
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certain defeat is for the losing team.
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Although mathematically imprecise, the trader’s definition can help us
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gain insight into how time affects option deltas. The more time left until an
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option’s expiration, the less certain it is whether the option will be ITM or
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OTM at expiration. The deltas of both the ITM and the OTM options reflect
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that uncertainty. The more time left in the life of the option, the closer the
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deltas tend to gravitate to 0.50. A 0.50 delta represents the greatest level of
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uncertainty—a coin toss. Exhibit 2.3 shows the deltas of a hypothetical
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equity call with a strike price of 50 at various stock prices with different
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times until expiration. All other parameters are held constant.
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EXHIBIT 2.3 Estimated delta of 50-strike call—impact of time. |