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65 Cards in this Set
- Front
- Back
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Three common uses of Delta?
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Measure of Option Sensitivity
Hedge Ratio Likelihood of becoming in-the-money |
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definition of delta?
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change in option premium expected from a small change in the stock price. (Ceteris paribus)
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delta is useful because.....
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it indicates the number of shares of stock required to mimic the return of the options.
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What does mimicing the return of the stock mean?
use call delta 0.75 |
a call delta of 0.75 will act like 0.75 shares of stock.
If the stock rises by a $1 the call option will advance by 0.75. |
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Call deltas are _____ whereas put deltas are ______.
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positive;negative
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In Black Scholes what is the call delta the equivalent of?
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N(d1)
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What is the delta range for a call option?
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between 0 and 1
0<= delta <= 1 |
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explain N(d1)=.xxxx
N(0.1309)=0.5521 |
For a change in the underlying stock price, the option would change about 55% as much.
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How does an out of the money option delta change over time as it approaches expiration?
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It aproaches zero and declines more rapidly as time passes. It eventually reaches zero and stays there.
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how does an at the money option delta change over time as it approaches expiration?
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The decline in delta is almost linear (horizontal) until the end where it approaches 0.50 at expiration
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how does an in the money option delta change over time as it approaches expiration?
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The options act more like the stock as expiration approaches. The delta rises as time passes, approaching 1 on expiration day.
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define hedge ratio
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a calculated value that indicates the quantity of an asset that must be acquired or sold to completely eliminate a certain type of risk with an investment position.
...How many units are needed to mimic the returns of the underlying asset. |
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What is the delta for a stock
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1
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What is a perfect hedge?
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a hedge that the profit and loss remain the same
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Short option position deltas are ______ in sign to long option position deltas.
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opposite
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How is delta a measure of the likelihood of becoming in the money?
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if an option has a delta of 0.45 there is a 45% chance that the stock price will be above the strike. In reality N(d2) is actually the probability of the likelihood of exercise
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for a put the likelihood of exercise is?
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N(-d2)
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long put delta
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negative
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long call delta
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positive
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short put delta
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positve
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short call delta
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negative
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N(d1)=.53
long 100 shares of stock how many long put contracts do you need for a perfect hedge? |
put delta=N(d1)-1 =.53-1= -.47
100-.47P=0 -.47p=-100 p=-100/-.47=212.77 2 contracts |
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What is Theta?
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a measure of the sensitivity of a call option to the time remaining until its expiration.
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Why is Theta greater than zero?
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because more time until expiration means more option time value.
(options become less valuable as they approach expiration) |
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Why do option traders think of theta as a negative number?
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because time until expiration can only get shorter.
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Describe theta in terms of a long put and long call?
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the passage of time hurts holder of long option position, so thinking of it as having a negative theta indicates the decline (loss) in premium is due solely to passing time.
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Describe theta in terms of a short position?
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the passage of time is to the benefit of the option writer, so theta is positive for short put or short call and represents a gain
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How do you calculate Theta per day?
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Divide Theta by 365
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time value decay?
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time value begins to deteriate more rapidly as expiration approaches
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define Gamma
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sensitivity of delta to changes in the stock price.
.....it is the second derivative of the option premium with respect to the stock price and the first derivative of delta with respect to the stock price. |
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options that are in the money are much ---- sensitive to changes in the underlying stock.
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more
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options that are out of the money are ---- sensitive to changes in the underlying stock.
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less
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What is a use of Gamma?
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as a measure of how often option portfolios need to be adjusted as stock prices change and time passes.
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When is Gamma at its maximum?
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when an option is at the money and near expiration.
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Gamma is an estimate of how much the ----- of an option changes when the price of the ------ moves $1.00.
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delta;stock
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A big gamma means that your delta
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can start changing dramatically for even a small move in the stock price.
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why does stock have a zero gamma?
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because its delta is always 1 it never changes.
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describe positive gamma with long calls...
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Positive gamma means that the delta of long calls will become more positive and move toward +1.00 when the stock prices rises, and less positive and move toward 0.00 when the stock price falls.
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describe positive gamma with long calls...
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It means that the delta of long puts will become more negative and move toward –1.00 when the stock price falls, and less negative and move toward 0.00 when the stock price rises.
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show mathmatically how gamma affects delta...
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delta+(+/-$1*gamma)=new delta
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Why is gamma called the curvature?
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if you graph gamma vrs the strike prices of an option it forms a steep curve.
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What does it mean that gamma is the maximum for at the money options?
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an at the money option is going to be the most sensitive to changes in the underlying stock price.
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call gamma=
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put gamma
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gamma is always the opposite of....
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theta
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define vega
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an estimate of how much the theoretical value of an option changes when volatility changes 1.00%.
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all long options have ----- vega
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positive
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the ___ the anticipated volatiltiy of the underlying asset the ____ the value of the option.
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higher;higher
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Positive vega means
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that the value of an option position increases when volatility increases, and decreases when volatility decreases.
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Negative vega means
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that the value of an option position decreases when volatility increases, and increases when volatility decreases.
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What are some other names given to vega?
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kappa,omega,tau,zeta,sigma prime
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What is Rho?
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change in the value of the option with respect to the risk free rate.
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Why is Rho one of the least used greeks?
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When interest rates in an economy are relatively stable, the chance that the value of an option position will change dramatically because of a drop or rise in interest rates is pretty low.
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What two derivatives measure how vega changes?
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Vomma
Vanna |
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Vomma
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is a measure of how sensitive vega is to changes in volatility
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Vanna
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measures the sensitivity of vega to changes in the price of the underlying security
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What is position delta, theta, gamma?
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sum of the delts, thetas, gammas in a portfolio
change with stock price changes and changes in volatiltiy |
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What is delta neutrality? why is it important?
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sum of the portfolio deltas equals 0.
profi and loss would not change much if the stock price changes |
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put delta
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n(d1)-1
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what is the directional market
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the attitude toward the market; bullish bearish
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What delta do bullish bearish and neutral investors want?
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bullish want + delta
bearish want - delta neutral want delta=0 |
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what is a spped market?
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how fast the market is moving
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what option is associated with a speed market?
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gamma how quickly the market is changing
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What kinds of options in a slow market (gamma <0)
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down-write calls
nuetral-write straddles up-write puts |
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What kinds of options in a Fast market (gamma>0)
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down-buy puts
neutral-buy straddles up-buy calls |
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What kinds of options in a neutral market (gamma=0)
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down-write calls;buy puts
neutral-spreads up-buy calls;write puts |
