24 lines
1.6 KiB
Plaintext
24 lines
1.6 KiB
Plaintext
Dynamic Inputs
|
||
Option deltas are not constants. They are calculated from the dynamic
|
||
inputs of the pricing model—stock price, time to expiration, volatility, and
|
||
so on. When these variables change, the changes affect the delta. These
|
||
changes can be mathematically quantified—they are systematic.
|
||
Understanding these patterns and other quirks as to how delta behaves can
|
||
help traders use this tool more effectively. Let’s discuss a few observations
|
||
about the characteristics of delta.
|
||
First, call and put deltas are closely related. Exhibit 2.2 is a partial option
|
||
chain of 70-day calls and puts in Rambus Incorporated (RMBS). The stock
|
||
was trading at $21.30 when this table was created. In Exhibit 2.2 , the 20
|
||
calls have a 0.66 delta.
|
||
EXHIBIT 2.2 RMBS Option chain with deltas.
|
||
Notice the deltas of the put-call pairs in this exhibit. As a general rule, the
|
||
absolute value of the call delta plus the absolute value of the put delta add
|
||
up to close to 1.00. The reason for this has to do with a mathematical
|
||
relationship called put-call parity, which is briefly discussed later in this
|
||
chapter and described in detail in Chapter 6. But with equity options, the
|
||
put-call pair doesn’t always add up to exactly 1.00.
|
||
Sometimes the difference is simply due to rounding. But sometimes there
|
||
are other reasons. For example, the 30-strike calls and puts in Exhibit 2.2
|
||
have deltas of 0.14 and −0.89, respectively. The absolute values of the
|
||
deltas add up to 1.03. Because of the possibility of early exercise of
|
||
American options, the put delta is a bit higher than the call delta would |