When a delta neutral hedge has been established using call options, which of the following statements is most correct? As the price of the underlying stock: A) changes, no changes are needed in the number of call options purchased. B) increases, some option contracts would need to be repurchased in order to retain the delta neutral position. C) increases, some option contracts would need to be sold in order to retain the delta neutral position. Your answer: C was incorrect. The correct answer was B) increases, some option contracts would need to be repurchased in order to retain the delta neutral position. As the stock price increases, the delta of the call option increases as well, requiring fewer option contracts to hedge against the underlying stock price movements. Therefore, some options contracts would need to be repurchased in order to maintain the hedge. Can someone please explain the above q & a to me? I thought: Delta = change Call / change Stock So if the stock price increases, doesn’t delta decrease? The answer is saying delta increases…
Call option - Delta is slope of prior to maturity pay off of a call option. The slope increases from 0 to 1 … it is 1 when option is at the money. (as asset price increases)… If you look at the diagram in the book …this would be very clear… Delta of Put on the other hand increases from -1 to 0. (as asset price increases)
It’s all about Gamma.
charu_mulye Wrote: ------------------------------------------------------- > Call option - > > Delta is slope of prior to maturity pay off of a > call option. > The slope increases from 0 to 1 … it is 1 when > option is at the money. (as asset price > increases)… > Delta is at 1 when the option is at (or in) the money AT EXPIRATION, never before. Before time T the asset delta can only approach 1 as a call option gets further in the money and as time passes when in the money.
as the stock px moves up, on the call side the delta INCREASES. do go take a look at the payoff graphs and it’ll come in clearly. if you stock let’s say is at $20 and your call is at $50 (way out of the money), if your stock px moves $5, your call will move but not a ton b/c it’s still way out of the money. so the change in the call over change in stock px will be some kind of small fraction. now, what if the stock keeps moving up- now it moves from $40 to $45… as we get closer and closer to this thing being at the money or in the money, the call is going to start moving closer and closer to a 1 to 1 move with the stock price. so your delta is increasing because it’s getting closer and closer to 1. calls go from 0 to 1. so as the stock price increases, the delta increases, and you’ll need less calls to hedge the position.
You bought stock and sold calls. Never forget this formula H = nS - C where n is your hedge ratio or delta, S is the stock price, and c are the call options (which you’ve sold short)
& H = nS + P
I’ve got a swaption on your gamma
Hope I am in/at-the-money when I expire on 1st week of June. Investing is subject to significant market risk please read the prospectus before investing (swaptiongamma indenture) - Only allowed to be exercised on 6th June, so an European option. - It’s an OTC - because I mature, 1st Sat of June, unlike the usual 3rd Fri of the month. - The trading hrs on that Sat will be 9 to 5 - Anybody holding me will suffer a winners-curse phenomena, as passing L2 is not going to make a significant difference (if at all people know what ‘a’ CFA is). - Strike price decided by clearing house (CFAI) depending upon the bid-ask collected on that day. - Speculators and BSM OPM says intrinsic X = 70 - Premium paid to Clearing house (Registeration fees) - 3rd Party gurantor (Schweser) - Up tick rule applicable (no negative marking) - historic volatility increased from 25% (last year 4 options) to 33% (3 options this year) - Only affirmative covenant - need to sit for all 6 hrs to be not counted as no-show. - LONG has the right to destroy the bars if exercised.