 # Options/Greeks

Here’s a good one… A put option with an exercise price of \$45 is trading for \$3.50. The current stock 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

d? increase in price moves the put out of the money, thus decreasing delta, and gamma is maximized at strike price, thus the only way to go is down

D !

^^ agree D

D

Sorry guys, D is not correct. Think more about how delta works for a put.

Gamma must decrease so by default B?

delta in puts works in the opposite direction. so if stock price increases, delta decreases. But at the money delta should be at it’s minimum of -1 , so the only way to go it less negative towards 0 - hence it increases? since its moving out of the money? shucks…wish i had my books with me. Choice No 2. B still sticking with the gamma theory though.

Yep, B. Delta is always between 0 and -1 for a put option. A deep in the money put will have a delta of -1 and an out of the money put will have a delta approaching 0. So as this put option gets further out of the money, the delta increases at it becomes less negative.

because delta is less than zero for a put, it going out of the money makes it less of a negative number, so delta increases? is that how to think about it? agree if not D it must be B.

mumukada Wrote: ------------------------------------------------------- > delta in puts works in the opposite direction. > > so if stock price increases, delta decreases. But > at the money delta should be at it’s minimum of -1 > , so the only way to go it less negative towards 0 > - hence it increases? > > since its moving out of the money? > > shucks…wish i had my books with me. > > Choice No 2. B > > still sticking with the gamma theory though. at the money delta is not at it’s minimum of -1, put deltas approach -1 as it becomes more and more in the money. Think of a put with an exercise price of 50 and a current price of \$20. For every dollar the stock price goes down, the put price should go up by close to a dollar. But you are correct in say the put delta increases as it moves further out of the money.

bannisja Wrote: ------------------------------------------------------- > because delta is less than zero for a put, it > going out of the money makes it less of a negative > number, so delta increases? is that how to think > about it? agree if not D it must be B. yes, you are thinking about that correctly.

oh yes ozzy… i was confusing at the money with in the money…

i think this question is badly worded…because technically the delta is decreasing because the put is becoming worth less money as the dollar price increases. But in terms of this question, a decrease is an increase when you move from -1 to 0. I would be careful on the test as to how the question could be worded.

I personally think the delta is technically increasing. The absolute value of the delta is decreasing, though.

B. Delta is increasing which is bad for a put.

-1 to 0 - less negative = increasing. we discussed this sometime earlier this week and JDV weighed in as well

delta=P1-P0/S1-S0----this value will decrease as you move further and further from the money. I DO understand that the scale for delta is -1 (in the money) to 0 far out of the money, and thus technically the delta figure is increasing. But from a pure definitive standpoint that changes in put price decrease as strike moves away from money would lead to a negative interpretation for delta, but using the normative scale of -1 to 0 leads to the idea of delta increasing. Just my 2 cents.