20 lines
1.3 KiB
Plaintext
20 lines
1.3 KiB
Plaintext
Effect of Volatility on Delta
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The level of volatility affects option deltas as well. We’ll discuss volatility
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in more detail in future chapters, but it’s important to address it here as it
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relates to the concept of delta. Exhibit 2.4 shows how changing the
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volatility percentage (explained further in Chapter 3), as opposed to the
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time to expiration, affects option deltas. In this table, the delta of a call with
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91 days until expiration is studied.
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EXHIBIT 2.4 Estimated delta of 50-strike call—impact of volatility.
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Notice the effect that volatility has on the deltas of this option with the
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underlying stock at various prices. In this table, at a low volatility with the
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call deep in- or out-of-the-money, the delta is very large or very small,
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respectively. At 10 percent volatility with the stock at $58 a share, the delta
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is 1.00. At that same volatility level with the stock at $42 a share, the delta
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is 0.
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But at higher volatility levels, the deltas change. With the stock at $58, a
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45 percent volatility gives the 50-strike call a 0.79 delta—much smaller
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than it was at the low volatility level. With the stock at $42, a 45-percent
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volatility returns a 0.30 delta for the call. Generally speaking, ITM option
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deltas are smaller given a higher volatility assumption, and OTM option
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deltas are bigger with a higher volatility. |