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65 Cards in this Set
 Front
 Back
Three common uses of Delta?

Measure of Option Sensitivity
Hedge Ratio Likelihood of becoming inthemoney 

definition of delta?

change in option premium expected from a small change in the stock price. (Ceteris paribus)


delta is useful because.....

it indicates the number of shares of stock required to mimic the return of the options.


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. 

Call deltas are _____ whereas put deltas are ______.

positive;negative


In Black Scholes what is the call delta the equivalent of?

N(d1)


What is the delta range for a call option?

between 0 and 1
0<= delta <= 1 

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.


How does an out of the money option delta change over time as it approaches expiration?

It aproaches zero and declines more rapidly as time passes. It eventually reaches zero and stays there.


how does an at the money option delta change over time as it approaches expiration?

The decline in delta is almost linear (horizontal) until the end where it approaches 0.50 at expiration


how does an in the money option delta change over time as it approaches expiration?

The options act more like the stock as expiration approaches. The delta rises as time passes, approaching 1 on expiration day.


define hedge ratio

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. 

What is the delta for a stock

1


What is a perfect hedge?

a hedge that the profit and loss remain the same


Short option position deltas are ______ in sign to long option position deltas.

opposite


How is delta a measure of the likelihood of becoming in the money?

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


for a put the likelihood of exercise is?

N(d2)


long put delta

negative


long call delta

positive


short put delta

positve


short call delta

negative


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 =.531= .47
100.47P=0 .47p=100 p=100/.47=212.77 2 contracts 

What is Theta?

a measure of the sensitivity of a call option to the time remaining until its expiration.


Why is Theta greater than zero?

because more time until expiration means more option time value.
(options become less valuable as they approach expiration) 

Why do option traders think of theta as a negative number?

because time until expiration can only get shorter.


Describe theta in terms of a long put and long call?

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.


Describe theta in terms of a short position?

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


How do you calculate Theta per day?

Divide Theta by 365


time value decay?

time value begins to deteriate more rapidly as expiration approaches


define Gamma

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. 

options that are in the money are much  sensitive to changes in the underlying stock.

more


options that are out of the money are  sensitive to changes in the underlying stock.

less


What is a use of Gamma?

as a measure of how often option portfolios need to be adjusted as stock prices change and time passes.


When is Gamma at its maximum?

when an option is at the money and near expiration.


Gamma is an estimate of how much the  of an option changes when the price of the  moves $1.00.

delta;stock


A big gamma means that your delta

can start changing dramatically for even a small move in the stock price.


why does stock have a zero gamma?

because its delta is always 1 it never changes.


describe positive gamma with long calls...

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.


describe positive gamma with long calls...

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.


show mathmatically how gamma affects delta...

delta+(+/$1*gamma)=new delta


Why is gamma called the curvature?

if you graph gamma vrs the strike prices of an option it forms a steep curve.


What does it mean that gamma is the maximum for at the money options?

an at the money option is going to be the most sensitive to changes in the underlying stock price.


call gamma=

put gamma


gamma is always the opposite of....

theta


define vega

an estimate of how much the theoretical value of an option changes when volatility changes 1.00%.


all long options have  vega

positive


the ___ the anticipated volatiltiy of the underlying asset the ____ the value of the option.

higher;higher


Positive vega means

that the value of an option position increases when volatility increases, and decreases when volatility decreases.


Negative vega means

that the value of an option position decreases when volatility increases, and increases when volatility decreases.


What are some other names given to vega?

kappa,omega,tau,zeta,sigma prime


What is Rho?

change in the value of the option with respect to the risk free rate.


Why is Rho one of the least used greeks?

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.


What two derivatives measure how vega changes?

Vomma
Vanna 

Vomma

is a measure of how sensitive vega is to changes in volatility


Vanna

measures the sensitivity of vega to changes in the price of the underlying security


What is position delta, theta, gamma?

sum of the delts, thetas, gammas in a portfolio
change with stock price changes and changes in volatiltiy 

What is delta neutrality? why is it important?

sum of the portfolio deltas equals 0.
profi and loss would not change much if the stock price changes 

put delta

n(d1)1


what is the directional market

the attitude toward the market; bullish bearish


What delta do bullish bearish and neutral investors want?

bullish want + delta
bearish want  delta neutral want delta=0 

what is a spped market?

how fast the market is moving


what option is associated with a speed market?

gamma how quickly the market is changing


What kinds of options in a slow market (gamma <0)

downwrite calls
nuetralwrite straddles upwrite puts 

What kinds of options in a Fast market (gamma>0)

downbuy puts
neutralbuy straddles upbuy calls 

What kinds of options in a neutral market (gamma=0)

downwrite calls;buy puts
neutralspreads upbuy calls;write puts 