The TradingEdge

[JefftDecker]

Option sticky

For each option and set of risk measures below, to the nearest .01, what will be the option's new price if the given changes in market conditions occur? (Note: there are many factors that determine an options price, but this is a simple hw lesson to how Delta, Gamma and Vega affect the price.) Current Option Price = 4.55 Delta = .62 Gamma = .07 Vega .04 The underlying price rises $3 while Implied Volatility rises by 3%. (Note: gamma and vega does not change in this scenario. I will post the answer this following weekend with explanation.) Answer: The answer to the new option price for last weeks homework is $6.74. Ive stated gamma and Vega doesn't change and since theta isn't mentioned, there was no time decay. How to calculate that though: Delta is the increase/decrease every time underlying moves $1 Gamma is the increase/decrease in Delta every time underlying moves $1 Vega is the increase/decrease every time Implied Volatility moves 1%. So you can add .04 (Vega) three times to the option price. Then add .62 (delta) to option price. Then add .07 to delta which equals .69, then add .69 to option price. Then you'll have to do that again. Below is the math you can see visually:


MrKenn (MODERATOR)08/04/2019
1) To understand how sensitive an option is to time decay and implied volatility, which of the following greeks would you use? Select all that apply. a) Vega b) Theta c) Gamma d) Delta Answer: Theta and vega -Theta and vega measure how sensitive an option is to time decay and implied volatility, respectively. Delta and gamma measure how sensitive an option is to the price of the underlying. 2) Which theta would be more desirable for a buyer? a) -.08 b) -.04 c) -.14 d) -.10 Answer: -.04 -A theta of -.04 would be more desirable for a buyer because theta represents how much value is lost each day. A buyer wants her contract to grow in value as much as possible—the lower the theta, the less value is lost each day she’s in the trade. 3) Original Premium = 1.01 / Delta = .25 / Gamma = ..09 / Theta = -.02 / Vega = .00 - Given this info, if the price of underlying stock increases by $1 tomorrow, the new premium would be $? Answer: $1.24 If the underlying stock increased by $1 tomorrow, the new premium would be $1.24 ($1.01 + .25 – .02). Delta is .25 for the first dollar move, and theta lost -.02 in one day. Gamma isn’t a factor since the underlying only moved $1, and vega isn’t a factor because it’s .00. 4) Original Premium = 1.40 / Delta = .16 / Gamma = .14 / Theta = -.03 / Vega = .01 Given this info, if the price of underlying stock increases by $2 tomorrow, the new premium would be $? Answer: $1.86 If the underlying stock increased by $2, the new premium would be $1.86 ($1.40 + .16 + .30). Delta is .16 for the first dollar move, and the new delta is .30 for the second dollar move (.16 + .14). Theta isn’t a factor since no time has passed, and vega isn’t a factor because there’s no change in implied volatility.