At expiry, your pnl (as evidenced by the well-known option payoff diagram) will be, by definition, S - K - (price you paid for the option), assuming you bought a call. S is spot, K is strike.
Does that make sense?
Does that make sense?
fx option intrinsic value
- Thread starter Nashequilibrium
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Makes sense.....i really appreciate you taking time out for this feed back thanks.
My final question on this matter. If (S-K) - 0P= net profit, my problem comes in with delta. If i buy a $1000 contract, i get $10 a point movement if delta is 1 to 1 or if i am holdin a spot position. How can i times my net profit by $10 when due to delta i have being making between $5 and $10 during the lifetime of the option, due to the variability of delta?
Or is it that at experation all price movement above strike would be given to me at $10/ delta being 1 to 1 with the underlying?
Example, i am currently holding nzd/usd spot position since th option expired in the money.
I bought an atm put for 35pts on $100,000 contract, so cost was $350 at $10 a point. My strike was at 0.6510 and price is currently at 0.6330 and i am making $1761 holding the spot pos now.
I bought an atm put for 35pts on $100,000 contract, so cost was $350 at $10 a point. My strike was at 0.6510 and price is currently at 0.6330 and i am making $1761 holding the spot pos now.
If the previous explanations dont clear it up for you Im not sure that this will, but here goes anyway.
When you have an option with time remaining the change in your PL will depend on your delta, theta, gamma, vega and Rho. your position is the option. however once your option expires, generally speaking 1 of 2 things happen. if it is out of the money nothing happens, you lose all the premium you paid for for it, game over, try again. BUT if it finishes in the money your option is converted into a position in the underlying. Once this happens the option is nothing. There is no delta, theta, vega, gamma or Rho. Forget it, its finished. The only profit you have is the difference between the strike price and the current price (minus the amount you paid for it). If your P&L is showing something else then either it is wrong or you are reading it wrong. Heres an example.
You buy 1 EUR/USD call for 100 ticks @ 1.4500
EUR/USD is at 1.4700 at expiry. You now are the proud owner of 1 EUR/USD Futures contract. your gross profit is 1.4700-1.4500 = 200 ticks. Now deduct your purchase cost of 100 ticks. You are left with a profit of 100 ticks. Nothing more, nothing less......
When you have an option with time remaining the change in your PL will depend on your delta, theta, gamma, vega and Rho. your position is the option. however once your option expires, generally speaking 1 of 2 things happen. if it is out of the money nothing happens, you lose all the premium you paid for for it, game over, try again. BUT if it finishes in the money your option is converted into a position in the underlying. Once this happens the option is nothing. There is no delta, theta, vega, gamma or Rho. Forget it, its finished. The only profit you have is the difference between the strike price and the current price (minus the amount you paid for it). If your P&L is showing something else then either it is wrong or you are reading it wrong. Heres an example.
You buy 1 EUR/USD call for 100 ticks @ 1.4500
EUR/USD is at 1.4700 at expiry. You now are the proud owner of 1 EUR/USD Futures contract. your gross profit is 1.4700-1.4500 = 200 ticks. Now deduct your purchase cost of 100 ticks. You are left with a profit of 100 ticks. Nothing more, nothing less......
Excellent, that clears everything. Thanks. I was worried about the delta and trying to proportion for the variance in delta through the life time of the option. Thanks a lot. It also means that, example i bought a way out the money put on aud few days ago and it started making me a net profit before it hit the strike price, so that means at experation when i let it turn into a spot, i will loose the money i was making before it hit the strike and i will just have the profits from after the strike.
Thanks a lot, for clearing all up.
That is correct. but as you get closer to expiration you will see Time decay eat your profits until it gets to zero, (if it is out of the money) even if it misses by just 1 tick.
Thanks............i am used of always looking for the trap door when trading. I was actually making things harder for myself but this makes things much easier.