21 lines
1.4 KiB
Plaintext
21 lines
1.4 KiB
Plaintext
spread and a gamma of −0.72, one might think that his delta would increase
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to 0.90 with Bed Bath & Beyond a dollar lower (18 − [−0.072 × 1.00]). But
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because a week has passed, his delta would actually get somewhat more
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positive. The shorter-term call’s delta will get smaller (closer to zero) at a
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faster rate compared to the longer-term call because it has less time to
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expiration. Thus, the positive delta of the long-term option begins to
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outweigh the negative delta of the short-term option as time passes.
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In this scenario, Richard would have almost broken even because what
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would be lost on stock price movement, is made up for by theta gains.
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Richard can sell about 100 shares of Bed Bath & Beyond to eliminate his
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immediate directional risk and stem further delta losses. The good news is
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that if Bed Bath & Beyond declines more after this hedge, the profit from
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the short stock offsets losses from the long delta. The bad news is that if
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BBBY rebounds, losses from the short stock offset gains from the long
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delta.
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After Richard’s hedge trade is executed, his delta would be zero. His
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other greeks remain unchanged. The idea is that if Bed Bath & Beyond
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stays at its new price level of $56.50, he reaps the benefits of theta
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increasing with time from $18 per day. Richard is accepting the new price
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level and any profits or losses that have occurred so far. He simply adjusts
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his directional exposure to a zero delta. |