Schweser pg.272, SS 17 q13. A put option with an exercise price of $45 is trading for $3.50. The current price is $45. What is the most likely effect on the option’s delta and gamma if the stock price increases to $50? Delta Gamma a) Increase Increase b) Increase Decrease c) Decrease Increase d) Decrease Decrease The answer is b, but why does Delta increase when the price of the underlying stock increase. Isn’t there a negative relationship?

increases = becomes a smaller negative number, e.g., goes from -0.8 to -0.4

gamma is highest for ATM options (strike price = underlying), delta is monotonic (delta of deep in the money put [underlying significantly lower than the strike price] would be close to -1, delta of deep out of the money put [underlying significantly higher than the strike price] would be close to 0) -> B

Delta for a put goes from -1 to 0. Remember that delta is the amount of change in the option for a one unit move for the stock. Delta maxes at -1, meaning that when the stock goes up the value of the opton goes down one. Conversely if the stock goes down one the value of the option goes up one. This only occurs when the option is deep in the money though. When the option isn’t deep in the money the move will be closer to zero (eg -0.5). When the option is deep OUT of the money the delta will approach zero. In which case the stock price movement does just about nothing to the option value.

The terminology used is a bit confusing here. Or maybe the way we use it in the trading floor is wrong. If a price of the underlier rises then the price of the a put falls. ususally we say that delta has decreased (absolute terms)… Any thoughts ?

I agree with MikeMilken…i was a member of three options exchanges for 15 years, and i got that answer wrong just now because the delta of a put goes down when the stock goes up, duh…apparently, i need to rethink how i would answer that question. Am glad i saw it here before i get smoked on something i consider remedial.

MikeMilken Wrote: ------------------------------------------------------- > The terminology used is a bit confusing here. Or > maybe the way we use it in the trading floor is > wrong. > > If a price of the underlier rises then the price > of the a put falls. ususally we say that delta > has decreased (absolute terms)… > > Any thoughts ? Yeah, when a negative number “has decreased (absolute terms)…” another way to put that is “increased”