22 lines
1.5 KiB
Plaintext
22 lines
1.5 KiB
Plaintext
The gamma of the 37.50 call is about 72 percent that of the 35 call. But
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the theta of the 37.50 call is about half that of the 35 call. Kim is improving
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her gamma/theta relationship by buying the OTM, but with the call being so
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far out-of-the-money and so inexpensive, the theta needs to be taken with a
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grain of salt. It is ultimately gamma that will make or break this delta play.
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The price of the option is 0.20—a rather low premium. In order for the
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call to gain in value, delta has to go to work with help from gamma. At this
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point, the delta is small, only 0.185. If Kim’s forecast is correct and there is
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a big move upward, gamma will cause the delta to increase, and therefore
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also the premium to increase exponentially. The call’s sensitivity to gamma,
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however, is dynamic.
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Exhibit 4.7 shows how the gamma of the 37.50 call changes as the stock
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price moves over time. At any point in time, gamma is highest when the call
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is ATM. However, so is theta. Kim wants to reap as much benefit from
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gamma as possible while minimizing her exposure to theta. Ideally, she
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wants Disney to rally through the strike price—through the high gamma
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and back to the low theta. After three weeks pass, with 23 days until
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expiration, if Disney is at $37 a share, the gamma almost doubles, to 0.237.
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When the call is ATM, the delta increases at its fastest rate. As Disney rises
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above the strike, the gamma figures in the table begin to decline.
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EXHIBIT 4.7 Disney 37.50 call price–time matrix–gamma.
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