A put option with an Exercise price of 45 is trading for $3.5. Current stock price is 45. What is the most likely effect on options delta & Gamma if the stock price increases to $50. A. both Delta & Gamma will increase B. both Delta & Gamma will decrease C. One will increase & the other will decrease Answer: C The put option is currently at the money since exercise price is = stock price. as stock price increases delta increases towards zero, becoming less negative Could someone explain this… i thought Put options delta is negatively related to price…
You are correct in saying that Put options delta is negative. So when the PUT was out of money it was say -1 and then as it’s starts moving towards the strike price, it becomes less and less negative. So say it becomes -0.5 from -1 (thus less negative). Eventually when S=X (at the money PUT), the delta of put would have been very close to 0. So over its life it travelled from -1 to 0 and hence it’s becoming less and less negative and moving eastwards on a time-line. Gamma is max for ATM. So Gamma increases and put delta decreases. Ans C
Swaption, The Delta was -0.5 (approximately since it is ATM). The Spot increases so the option is OTM instead of ATM, which will increase the delta (to -0.45 for instance). Gamma is highest when an option is ATM so as a result of a movement in the underlying (all else equal) gamma should decrease. So it’s the opposite of what you say (but still answer C) which is exactly what you were saying but your conclusion was wrong!
haha yes. Thanks for the correction. Gamma decreases and delta increases (-1 to 0 is an increase [less negative]). That’s what I explained in the paragraph above and typed the wrong conclusion. ;-p Sigh, That’s what happens when you study on a Sat morning while others are enjoying the sun and summer.
Great !!! Makes sense now Thanks swaption & Lurky