Isn't the following FAQ-Answer, as well the question itself, total BS?
This is from the FAQ of OIC (Options Industry Council) at http://www.optionseducation.org/content/oic/en/tools/faq/technical_information.html
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Q:
I am perplexed when the option premium disappears from my options. I paid $6.40 for a 20 strike call with two years until expiration when the stock was trading at $20 per share. Now the stock is above $50, but the premium has totally disappeared. The option still has 18 months to expiration and I don’t understand why the premium went away so quickly. It seems like I lost $6.40 somewhere.
A:
What you have described is the phenomenon of Delta. We define Delta as the ratio of the theoretical price change of the option to the price change of the underlying stock. The rule of thumb is that an at-the-money option has a Delta of approximately .50. Since your call option was right at-the-money when you bought it, for each $1 that the stock went up, your option increased by $0.50. As the stock continued to increase, so did the value of the option, but at a slower rate than the stock.
At some point, the Delta of your option approached 1.00 and it began to move at the same rate as the stock. However, during that time, the movement of the stock outpaced that of the option by $6.40, the amount of your premium. If the stock fell back toward $20, the process would reverse itself and you would see some time value premium reappear.
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This is from the FAQ of OIC (Options Industry Council) at http://www.optionseducation.org/content/oic/en/tools/faq/technical_information.html
"
Q:
I am perplexed when the option premium disappears from my options. I paid $6.40 for a 20 strike call with two years until expiration when the stock was trading at $20 per share. Now the stock is above $50, but the premium has totally disappeared. The option still has 18 months to expiration and I don’t understand why the premium went away so quickly. It seems like I lost $6.40 somewhere.
A:
What you have described is the phenomenon of Delta. We define Delta as the ratio of the theoretical price change of the option to the price change of the underlying stock. The rule of thumb is that an at-the-money option has a Delta of approximately .50. Since your call option was right at-the-money when you bought it, for each $1 that the stock went up, your option increased by $0.50. As the stock continued to increase, so did the value of the option, but at a slower rate than the stock.
At some point, the Delta of your option approached 1.00 and it began to move at the same rate as the stock. However, during that time, the movement of the stock outpaced that of the option by $6.40, the amount of your premium. If the stock fell back toward $20, the process would reverse itself and you would see some time value premium reappear.
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