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Option Question about Delta
- Thread starter the
- Start date
Quote from atticus:
You're wrong and your house (cfa) is built on mud.
And your house is built on sludge after a mudslide.
You know the limitation of deltas, why argue when that is what delta is? It's not at all likely that that option will move $1. Delta's most likely approximation will show you what percentage change it will have for each $1 move. You're taking the $1 move out of context, when it can be infinitely divisible and normalized for the price of the option.
There's thousands of other cases where delta wouldn't be $1 exactly for a strike equal to underlying's price. It's just that delta will predict the change approximately before the change happens. Assuming you know which way it will move, it is not likely to be $1, but incrementally the delta definition will hold for any normal market move you want to watch options on.
Quote from bwolinsky:
And your house is built on sludge after a mudslide.
You know the limitation of deltas, why argue when that is what delta is? It's not at all likely that that option will move $1. Delta's most likely approximation will show you what percentage change it will have for each $1 move. You're taking the $1 move out of context, when it can be infinitely divisible and normalized for the price of the option.
There's thousands of other cases where delta wouldn't be $1 exactly for a strike equal to underlying's price. It's just that delta will predict the change approximately before the change happens. Assuming you know which way it will move, it is not likely to be $1, but incrementally the delta definition will hold for any normal market move you want to watch options on.
Does the .5xxx accurately represent the 5C change in value on a $1 rally in FTR? Yes or no?
Quote from bwolinsky:
I'm assuming you're asking about the .51 delta on the $5 strike. That one would move from $.15 to $0.66 for FTR increasing $1 to $6.
Then why is the 4 strike 1.00 mid instead of 0.66? That one is $1 in the money, which is what the 5 strike would be if FTR increased to $6.
Don't you see this?
Quote from atticus:
Does the .5xxx accurately represent the 5C change in value on a $1 rally in FTR? Yes or no?
If I tell you that that option won't move $1 because that stock won't move $1, I guarantee the definition of delta will hold. The definition of delta will also hold as the option prices and underlying change. The 0.5xxx delta will be approximately the same the whole way up. So if we watched FTR go to $5.50 from $5, naturally you'd expect the option to be worth at least $0.50 but the delta will still be high enough that it will approximate the percentage change.
Again, there's thousands of strikes equal to price that don't have deltas of $1. You're not proving anything. The delta will be as large and consistent as when there's a respective percentage change in the underlying.
Quote from bwolinsky:
The FTR 5 cent is 0.0075 so that would move less than 1 cent and the other FTR is 0.06 something so those are so far otm that delta wouldn't be a consideration.
I'm assuming you're asking about the .51 delta on the $5 strike. That one would move from $.15 to $0.66 for FTR increasing $1 to $6.
The percentage epsilon leverage factor is $0.66/$0.15-1=3.4. The option would increase 340% for a 20% move in the underlying. Leverage factor is then 3.4/0.2=17, meaning you could make 17 times the percentage change in the underlying's 20% move, which isn't likely.
If you were trying to double your money on $10,000, the way to use delta by anticipating the $1 move would require an investment of $20,000/(1+3.4)=$4,545.45=$4545.45/$150=30 Contracts. Let's see the math here.
30 contracts make $0.51 or $510 per contract moves 30*$510=15,300+(10,000-4500)=$20,800.
Holy cow.... he really wrote this. I glossed over it once I realized I wasn't getting a yes/no reply.
Really Beau? The internet (and herps) are forever.
Quote from bwolinsky:
If I tell you that that option won't move $1 because that stock won't move $1, I guarantee the definition of delta will hold. The definition of delta will also hold as the option prices and underlying change. The 0.5xxx delta will be approximately the same the whole way up. So if we watched FTR go to $5.50 from $5, naturally you'd expect the option to be worth at least $0.50 but the delta will still be high enough that it will approximate the percentage change.
Again, there's thousands of strikes equal to price that don't have deltas of $1. You're not proving anything. The delta will be as large and consistent as when there's a respective percentage change in the underlying.
wheeeeeeeee! PROBABILITIES! academic vacuum! Beau says it won't move a buck. win.
Quote from Kevin Schmit:
Then why is the 4 strike 1.00 mid instead of 0.66? That one is $1 in the money, which is what the 5 strike would be if FTR increased to $6.
Don't you see this?
Atticus' point is that if the strike is $5, and the stock's at $5, delta should be $1. Well, sorry folks, it doesn't work like that. The probability FTR moves $1 is unlikely, and if it was likely, delta would be higher relatively speaking.
For normal markets, delta will predict what the move in the option will be under normal market conditions. His point is not well taken because he's saying if that is the CFA's definition then delta would be $1 or so, but delta is only showing a typical option price movement for an incremental move in the underlying.
Again, there's hundreds of examples of this, but unless you watch the change in delta or realize delta's relatively stable those aren't what the predictions of delta are for.
Quote from bwolinsky:
Atticus' point is that if the strike is $5, and the stock's at $5, delta should be $1. Well, sorry folks, it doesn't work like that. The probability FTR moves $1 is unlikely, and if it was likely, delta would be higher relatively speaking.
For normal markets, delta will predict what the move in the option will be under normal market conditions. His point is not well taken because he's saying if that is the CFA's definition then delta would be $1 or so, but delta is only showing a typical option price movement for an incremental move in the underlying.
Again, there's hundreds of examples of this, but unless you watch the change in delta or realize delta's relatively stable those aren't what the predictions of delta are for.
NO, lol. I never stated that; implicitly or explicitly. That most certainly is not my argument.
Beau's deleted opus: http://tinypic.com/r/iptvv5/5
Quote from bwolinsky:
The probability FTR moves $1 is unlikely, and if it was likely, delta would be higher relatively speaking.
Probability meaning (derived from) vola? What if you double the vola from 35% to 70%? Then what is the delta of the 5C? Are you playing, or seriously injured?
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