options and stk price movement

C

clarodina

how to select options that match stk price movement exactly? for options that have delta 1, the movement is not that exact and there is big spread for these delta 1 options and those more itm options have more movement compared to less itm options despite all have delta 1
 
You can't. Options have their own supply and demand independent of the underlying. With a delta of 1 it will be as close as possible to mirroring the actual stock but just because the stock then goes up a few cents doesn't mean people are going to pay more for the option. There are other considerations with options such as time decay and volatility that can skew results.

I guess you could get closer to a true synthetic long by buying a call and selling a put at the same strike and expiration or a synthetic short by selling the call and buying the put...but I am not sure why you would want to do that.
 
Quote from clarodina:
----how to select options that match stk price movement exactly?
----for options that have delta 1, the movement is not that exact....
More...
For "theory" sake, you can adjust your option position size by using the reciprocal of delta as your multiplier. For an (ATM) at-the-money option with a delta ~0.50, you can trade 2 option contracts for each 100 shares instead. For an (OTM) out-of-the-money option with a delta ~0.25, you can trade 4 option contracts for each 100 shares instead. :cool:
 
Quote from nazzdack:

For "theory" sake, you can adjust your option position size by using the reciprocal of delta as your multiplier. For an (ATM) at-the-money option with a delta ~0.50, you can trade 2 option contracts for each 100 shares instead. For an (OTM) out-of-the-money option with a delta ~0.25, you can trade 4 option contracts for each 100 shares instead. :cool:
More...

As nazzdack mentioned this is only in "theory". The problem is no matter how you get to a delta of 1 you still can't get an exact movement dollar for dollar with the underlying. No matter how you get to a delta of 1 time decay and volatility will still affect accuracy.
 
You can create something very close to a long futures position, with a delta of 1, no time value, and a margin requirement, by creating a synthetic long -- buy a call and sell a put at the same strike price. If you do this on a stock where the options have a narrow bid/ask spread you will find that the gain/loss tracks very closely with the stock. Any time decay, and any increase or decrease in the volatility will affect both options equally, so cancels out. This is not due to some theoretical pricing model, any significant deviation from put-call parity creates an opportunity for risk free profits by arbs.
 
for synthetic long isn't this going to take double of spread because of two options position closing? one position spread is 3 cents two position would double. how is this approach be superior than using buying 2 calls at delta 0.5?

volatility and theta affects the price movement. how to adjust using the geeks ratios so the price movement would be same with the stk price movement? like delta 0.5 the adjustment would be double the position to get the same price movement

generally how much would the real delta change in option value be different than the theoritical one?
 
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