Yes it wasn’t a good hedge. When price/oz dropped, his inventory became worthless and the only losses he would have recovered is from the initial option premium from the options he sold.
Agreed… short call: - no price change, time decrease = gain - vol falls from 20 to 15% = gain short call & long underlying: - spot price falls = net loss (ignoring permium)
Lurky Wrote: ------------------------------------------------------- > A short position is a liability. It isn’t free > money… It could cost you a lot if the price > shoots to 100000 (although it was covered). So if > you are less short (as they were) you gain, simple > as. And vice versa. That is wrong. You have to look at the delta of the option, which was .52 I believe. So if you sold calls and the value increases by 1 , your inventory increases by 1 and the value of the calls you sold only increases by .52. So net net your up only .48
nyccfa2010 Wrote: ------------------------------------------------------- > Lurky Wrote: > -------------------------------------------------- > ----- > > A short position is a liability. It isn’t free > > money… It could cost you a lot if the price > > shoots to 100000 (although it was covered). So > if > > you are less short (as they were) you gain, > simple > > as. And vice versa. > > > That is wrong. You have to look at the delta of > the option, which was .52 I believe. So if you > sold calls and the value increases by 1 , your > inventory increases by 1 and the value of the > calls you sold only increases by .52. So net net > your up only .48 There I was talking about time at maturity. Which was only 3 months away and they were prepared to deliver the gold. They had enough inventory to cover the calls. So I wasn’t talking about the delta there, since it’s irrelevant for a call being covered.
@Florida_Gator hey I thought the same at first but then I saw there was three questions like that with the choice ‘no change in value’ and I rethought those questions differently. Answering three times ‘no change value’ is quite risky, no ?
is not theta always negative? (time decay)
Yes!!! i hope gain/gain is right!
YeeS_Mos Wrote: ------------------------------------------------------- > is not theta always negative? (time decay) Not if you are short the option…
I went with gain/gain really don’t want to think about that any more:)
Agree there was a gain coz theta decreased value of option