For some reason, I am not able to wrap my head around this concept. Let me see if I am getting this right. Scenario 1 - close to expiration If exercise price of call is close (above or below) to stock price, then delta is close to 1 and gamma is at its highest value If exercise price is deep ITM, then delta is close to 0 and gamma is also low. If excercise price is deep OTM, then delta is again close to 0 and gamma is again low. Scenario 2 - long time to expiration delta will only be close to 1 if exercise price is close to stock price, otherwise its usually between 0 and 1. Am I right with the above? I am pretty sure I am way off, but hopefully I can get it with you guys around. Cheers
In scenario 1, delta will be 1 if the stock is in the money or at the money. As we drift towards out of the money delta moves to 0. In Scenario 2, delta will be close to 1 only if the stock price is way in the money. If the stock price is at the money with a long time to expiration, delta will be somewhere in the middle between 0 and 1 depending on how much time is remaining - the closer to expiration (the closer to 1).
sparty419 Wrote: ------------------------------------------------------- > For some reason, I am not able to wrap my head > around this concept. Let me see if I am getting > this right. > > Scenario 1 - close to expiration > > If exercise price of call is close (above or > below) to stock price, then delta is close to 1 > and gamma is at its highest value > If exercise price is deep ITM, then delta is close > to 0 and gamma is also low. > If excercise price is deep OTM, then delta is > again close to 0 and gamma is again low. If option is AT-the-money (for a call) - then delta = 0.5, and gamma = 1. If options gets deeper in the money for a call, delta goes to 1, and gamma goes to 0. If options gets deeper out of the money, delta goes to 0, as does gamma. REMEMBER - Gamma is highest when the option is AT-the-money. > > Scenario 2 - long time to expiration > > delta will only be close to 1 if exercise price is > close to stock price, otherwise its usually > between 0 and 1. > There is a lot of time value to the option, so the closer the stock gets to the exercise price, the less quickly delta moves up to 0.5. When its in the money, it will move slower up to 1.0 as opposed to there being very little time until it expires. REMEMBER - the less time you have until expiration, the more quickly the delta will move. > Am I right with the above? I am pretty sure I am > way off, but hopefully I can get it with you guys > around. > > Cheers
I guess I posted right after you did and answered some of my doubts. Thanks. Now more importantly, how do I practice this topic to grill it into my head. What do you suggest?
If option is AT-the-money (for a call) - then delta = 0.5, and gamma = 1. If options gets deeper in the money for a call, delta goes to 1, and gamma goes to 0. If options gets deeper out of the money, delta goes to 0, as does gamma. REMEMBER - Gamma is highest when the option is AT-the-money. Gamma will not be 1. Gamma is the change in Delta. With a Delta of 0.5 the Gamma cannot be 1… Since that would result in a 1.5 or 0.5 Delta. Gamma will be 0.5 (let’s say at 1 day until expiration).
^ Gamma is always positive, ranges from 0 to +1. When it is at the money, it is at its peak (1.0). Then it goes down whichever way the stock moves. It looks like a bell curve. As far as drilling it into your head, more practice problems and keep reading it over. Just another concept you have to remember.
I created this chart to visualize this issue. I hope this is helpful. Also, please let me know if I missed or misunderstood anything… http://groups.google.com/group/cfa-2010-level3 The file is named OPTION.PDF
Thnaks guys. I’ll spend a few hours on this tomo. and see how i am doing. Appreciate your comments and thanks for the document, will go through it.
Hi mp, If you don’t mind, could you just write a quick summary on the behaviour of put options also? I know their delta moves from -1 to 0. Are their gamma the same as calls i.e. at 1 when they are at the money? From the above discussion, I am guessing when the security is close to expiration, put delta moves towards -0.5 when its execise price is close to the price of security? and close to 0 if it is in deep OTM and -1 when its in deep ITM? This is some confusing shit
These should help: http://www.optiontradingtips.com/greeks/delta.html http://www.optiontradingtips.com/greeks/gamma.html You are correct on your points. Gamma is the same as for calls.