-ve Delta

CFA Level II
#1

A negative delta indicates that the stock price and the call option are moving in opposite directions, is that correct or not?

as delta = (c1 - c0) / (s1 - s0)

this means if the answer is -ve, that s0 is larger than s1 and c1 is larger than c0

or c0 is larger than c1 and s1 is larger than s0.

Am i totatly wrong??

#2

Correct.

Delta’s negative for put options.

#3

Thanks a lot sir.

in one of the mock exams, the question was which of the statements is most likely correct

  1. a smaller gamma limits the effectiveness of delta hedging.

  2. a negative delta indicates that the call option price and the stock price will move in opposite directions

  3. a larger gamma means that there is more uncertainty as to whether the call option will expire out of the money.

What would you answer?

#4

  1. A smaller gamma means that delta will change less, requiring you to buy or sell fewer options to maintain a delta hedge. This is a good thing, not a bad thing, so this isn’t the correct answer.

  2. A negative delta indicates that the option price and the stock price will move in opposite directions, but that would make the option a put (most likely), not a call. If they didn’t have the word “call” in this answer, it’d clearly be correct; including “call” makes it questionable at best.

  3. A larger gamma means that there is a greater change in delta when the price of the stock changes, and this occurs primarily when the price is near the money. A near-the-money option has the greatest uncertainty whether it will expire in the money or out of the money, so this the correct answer.

I’d answer 3.

#5

Thanks alot sir! That was really clear.

#6

I’m glad that it was; you’re quite welcome.

(For what it’s worth: “a lot” is two words, not one. wink)

#7

He is Sir Thanksalot.

#8

Thankyoufortheclarification.Itwasreallyhelpful.