Hi there Quick question on the greeks. Imagine an at-the-money call option with 1 day left. How do I have to interpret the greeks in order to conclude whether the option will be in or out of the money at expiration? Delta would be around 0.5 Gamma would be high Can I derive a conclusion from gamma or delta? Thank you very much.
think you’d need a crystal ball to conclude one way or the other. this will depend on the price movement of the underlyer. All a 0.5 delta is telling you is that the option value will move by half as much as the underlyer and in the same direction. A high gamma is telling you that the delta itself is not very stable…
I can remember such a question on last years exam. This explanation under the 7th paragraph of Delta says that Delta can be used as a “crystal ball”. http://www.aadsoft.com/tutorial/greeks.htm
note it says 50/50 chance of ending up in the money. It’s like saying… ‘I can guarantee it will be either heads or tails if you flip a coin.’
Okay, i got that. But what is the difference between an at-the-money call with 1 left under Case A: Delta = 0.51 and Case B: Delta = 0.49 What would you do if you actually own that option in Case A - B? Has Case A a better probability of ending up in the money as compared to B?
> in order to conclude whether the option will be in or out of the money at expiration? You can’t do that.
delta does not tell you anything about probabilities. It only tells you the direction and amount of change in option value w.r.t. movement in the underlyer price. A higher delta tells me that the change in option value will be higher. in other words if the stock moves up(down) by $1, A’s value will go up(down) by $0.51 and B’s value will go up(down) by $0.49 but whether I end up in or out of the money depends on the direction of the movement of the underlyer and the probability will be the same for A and B
Gamma is highest at the money.
Cant this problem be done a year or 6 months out with risk neutral probabilities? size of down move 1/u Prob up 1+rf-D/U-D Prob down 1-Prop up Get the probabilities, multiple the size of the up move time probability of up/discount back to today