18 lines
1.1 KiB
Plaintext
18 lines
1.1 KiB
Plaintext
Day Three
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On this day, the market trends. First, the stock rises $0.50, at which point
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Harry sells 140 shares of stock at $40.50 to lock in gains from his delta and
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to get flat. However, the market continues to rally. At $41 a share, Harry is
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long another 1.40 deltas and so sells another 140 shares. The rally
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continues, and at $41.50 he sells another 140 shares to cover the delta.
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Finally, at the end of the day, the stock closes at $42 a share. Harry sells a
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final 140 shares to get flat.
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There was not any literal scalping of stock today. It was all selling.
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Nonetheless, gamma trading led to a profitable day.
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As the stock rose from $40 to $40.50, 140 deltas were created from
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positive gamma. Because the delta was zero at $40 and 140 at $40.50, the
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estimated average delta is found by dividing 140 in half. This estimated
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average delta multiplied by the $0.50 gain on the stock equals a $35 profit.
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The delta was zero after the adjustment made at $40.50, when 140 shares
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were sold. When the stock reached $41, another $35 was reaped from the
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average delta of 70 over the $0.50 move. This process was repeated every
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time the stock rose $0.50 and the delta was covered. |