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20 Cards in this Set
- Front
- Back
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Delta
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-Sensitivity of option price to changes in the underlying price.
-Probability that option will finish in-the-money. |
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Delta: at-the-money
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Call Delta --> .5
Put Delta --> -.5 |
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Delta: in-the-money
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Call Delta --> 1
Put Delta --> -1 |
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Delta: out-of-the-money
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Delta --> 0
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Gamma
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-Sensitivity of option price to changes in delta.
-Measure of directional risk. |
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Gamma as t --> T
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ATM: max; increases
ITM, OTM: decreases |
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Theta
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-Sensitivity of option price to changes in the time to expiration.
-Measure of time decay |
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Theta as t --> T
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ATM: max; increases
ITM, OTM: decreases |
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Theta as time decay
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-The further out in time you go, the smaller the time decay will be for an option.
-If you want to own an option, it is advantageous to purchase longer-term contracts. -If you want a strategy that profits from time decay, then you will want to short the shorter-term options, so that the loss in value due to time happens quickly |
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Vega
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Sensitivity of option price to changes in volatility.
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Vega and moneyness
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ATM: max
OTM: max %change |
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Vega and option type
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-An increase in volatility will increase the prices of options, and a decrease causes options prices to decrease.
-Vega affects calls more than puts. |
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Delta as t --> T
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ATM: increases
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Vega as t --> T
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Decreases
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Theta and volatility
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Theta is higher when volatility is lower.
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Delta and volatility
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When volatility increases:
ITM - delta decreases OTM - delta increases |
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Long call
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Long delta
Long gamma Long vega Short theta |
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Long put
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Short delta
Long gamma Long vega Short theta |
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Short call
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Short delta
Short gamma Short vega Long theta |
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Short put
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Long delta
Short gamma Short vega Long theta |
