Option Question about Delta

[Quickless]

the - Delta can probably mean all kinds of cool things. However, for you, the simplest explanation is probably the best.

Delta is a measure of the expected change in an option price, given a change in the stock price (underlying asset). A Delta of .5 would mean that if a stock price change by $1 you would expect the option for a particular strike to change by 50 cents.

How do you use it? In the simplest way - If you are trying to determine how an option price will change you do it in terms of how you think its underlying stock will change. If Delta = .5 and you anticipate the underlying stock to change by $2 then you would expect the option to change by about $1.

If you want to be fancy perhaps you can use Delta in some fashion to approximate the probability of whatever, but what you really want to do at all times is to be able to translate what you are doing into P/L.

 

[mastertrader456]

Agree with post above. Also focus on theta and veta. I think those are more important. You get a spike or drop in volatility and your delta means shit. And dont get eaten by time value my friend. Closer to ATM options lose time value the slowest.

 

[taowave]

Would you be kind enough to explain to an idiot what you mean by "options have the highest price for ATM strike"..

Thanks

Quote from tradingjournals:

Whoever confuses delta with the above prob, partioularly for ATM strike, is probably an idiot. However the more one gets away from ATM strike, the less is the difference between the two. The fact that options have the highest prioce for ATM strike, may be viewed as loud reflection of "the difference between delta and prob is highest ATM". Yet the idiots who write books take the worse case approximation to wrongly equate the two.

I have explained the analytical/intuitive underpinnings of the difference between the two in a blog post somewhere.

 

[mastertrader456]

No ones an idiot. Options have the highest price ATM because they have the highest probability of being exercised. Thus they have the highest intrinsic value. Options OTM have no intrinsic value and only extrinsic value(Time decay, etc.).

 

[KINGOFSHORTS]

Quote from mastertrader456:

All delta means is the amount the price of the option will change in value for every point the underlying stock moves. Delta is highest at the money and lowest out of the money. Gamma is how much the delta will change if the uderlying stock moved a pt.

They are really making things much mor difficult and confusing for the new to options folks.

Your explanation is simple enough.

 

[mastertrader456]

On the surface it seems complex but let it sink in and it becomes very easy. Options are a whole new world of strategies.

 

[taowave]

It appears when you refer to highest price,you mean largest "time value"?

Would you define intrinsic value?

Your terminology is very confusing

you lost me with ATM options having the highest probability of being exercised and having the highest intrinsic value?

Thanks

P.s. This isn't my first ride at the rodeo

Quote from mastertrader456:

No ones an idiot. Options have the highest price ATM because they have the highest probability of being exercised. Thus they have the highest intrinsic value. Options OTM have no intrinsic value and only extrinsic value(Time decay, etc.).

 

[atticus]

It's an issue of the forward. Nobody denies that, nor the case of the KO call. Flat rates/carry/curve and you can use it casually. Short duration pick-em binaries (non FX) are priced at 50/100 FV OTC. And no, the delta of an ATM C on GOOG at 8% rates out to Dec13 is not .50.

How are you guys going to split the Nobel monies?

 

[atticus]

Quote from mastertrader456:

No ones an idiot. Options have the highest price ATM because they have the highest probability of being exercised. Thus they have the highest intrinsic value. Options OTM have no intrinsic value and only extrinsic value(Time decay, etc.).

Any ITM option is more likely to be exercised, which also goes for price, or long verticals would routinely trade at a credit. Obviously ATM (fwd) have the highest extrinsic value.

 

[MasterAtWork]

Quote from atticus:

It's an issue of the forward. Nobody denies that, nor the case of the KO call. Flat rates/carry/curve and you can use it casually. Short duration pick-em binaries (non FX) are priced at 50/100 FV OTC. And no, the delta of an ATM C on GOOG at 8% rates out to Dec13 is not .50.

How are you guys going to split the Nobel monies?

The same way you're going to share Fields Medal with sle.