big picture stuff here but I only just started derivs-
why exactly are both vega and delta highest when option is at the money. Makes sense to me why there wouldn’t be a ton of responsiveness of the option to the underlying price if the option were way OUT of the money, but if its way IN the money, why wouldn’t a move up in the underlying lead to a pretty big move in the option?
I’m not sure about vega – I’d have to ponder it a bit – but I think that you’re mistaken about delta.
For a call option, delta ranges from 0 to +1; it’s highest (i.e., near +1) for a far in-the-money option.
For a put option, delta ranges from −1 to 0; it’s highest (i.e., near 0) for a far out-of-the-money option.
Perhaps you were thinking of gamma?
ahh yes- I do think I meant to ask about gamma…that info on delta is super helpful though thanks!
when would gamma be highest? I’m thinking it would be when the option is approaching or close to AT THE MONEY?
Vega is the sensitivity to volatility and is at the maximum at the money.
You may want to consider this :
If you are deep in the money, your underlying will have to undergo a huge change (lots of volatility) for your option to become worthless
Same if you are deep out of the money.
At the money, a little change (little volatility) of the underlying can make your option worth something or nothing.
sooo helpful…thank you! (and sorry for the basic Qs- got REALLY confused on those…)