SURE WIN : Calendar and Reverse Calendar Spread

[Don87109]

Quote from Optionspoet:

Hi everyone,

I remember most of you from the Yahoo days and was hoping to tap into the knowledge of the greeks that most of you have. A theoretical question has surfaced that I could not find any direct way of confirming the correct response. The analogy is as follows:

Which of the following best expresses a relationship similar to Delta : Price??

a) Gamma : Delta
b) Vega : Volatility
c) Theta : Time
d) Rho : Interest Rate
e) None of the above.

I have strong inclination towards (b) since delta measures the rate of change in option price relative to a change in the underlying's price and vega measures the rate of change in the option price relative to a change in the underlying's volatility.

I'm nixing the other choices because Gamma : Delta expresses an indirect effect on options price. Gamma affects delta which affects price, but does not relate directly to price as in the analogy. All the others measure a change relative to some other external factor (time decay, rates).

Please let me know if my logic is correct.

Many thanks in advance.

I would go with e) None of the above.

If my answer is wrong, then their are two other logical choices a) or b). Because like delta both of these define a change in their target parameter.

In summary, because one line of thinking has two possible answers I'd probably go with the logic that has only one answer "d)". Reinforcing "d)" might be that delta has nothing to do with theoretical price (okay it does define the change in TP).

Gotta say it's a poorly worded question.

Don

 

[Wayne Gibbous]

Quote from weewilly:

It's taken directly from a Portfolio Margin qualification test from a popular broker.

Question #12 in fact.

The analogy was not DELTA : PRICE, but DELTA : THEORETICAL PRICE.

So, did they give you Portfolio Margin?

The question, as stated by poet, was DELTA : PRICE, not DELTA : THEORETICAL PRICE.

DELTA : PRICE implies that the price refers to the underlying price. If this is true, then the answer is (A), as coach and I believe.

If the question is really DELTA : THEORETICAL PRICE, then that's a different question, isn't it?

 

[weewilly]

Quote from Wayne Gibbous:

The question, as stated by poet, was DELTA : PRICE, not DELTA : THEORETICAL PRICE.

DELTA : PRICE implies that the price refers to the underlying price. If this is true, then the answer is (A), as coach and I believe.

If the question is really DELTA : THEORETICAL PRICE, then that's a different question, isn't it?

The ethics of cheating on the test is really the point.

 

[opt789]

The question is delta: theoretical price, and the answer is A. I have already taken and passed the test. Delta measures the change in the theoretical price of an option in relation to a change in the underlying price. Gamma measures the change in the delta of an option in relation to a change in the underlying price.

 

[Don87109]

Quote from opt789:

The question is delta: theoretical price, and the answer is A. I have already taken and passed the test. Delta measures the change in the theoretical price of an option in relation to a change in the underlying price. Gamma measures the change in the delta of an option in relation to a change in the underlying price.

Give the man a cigar.

That sounds like the best explanation so far.

Don

 

[RichardRimes]

Quote from arizonadreamer:

Opt789,

Thanks for taking the time to post your detailed answer. I will have to do some additional research on PM.

I have done a bunch of RCs in the past, some with great results, others so-so. The main plays I have done have been "event-related" ones (earnings, FDA announcements etc.) where I have only held the position a day or two.

Yep, you are correct, if we get aggressive and we are wrong (about timing of event, extent of volatility collapse, extent of move on underlying) it can be a novel way to lose our money very quickly. LOL

Thanks again.

AZD

AZD brought this back up as those using TOS will be getting PM next week. I too have been locked out (pretty much) from RC's because of margin restrictions and found this very interesting...
when comparingReg T with PM on Non-comforming Long condor

Long 50 calls IBM APR 85@8.99
Short 50 calls IBM Jul 90@ 6.82
Short 50 calls IBM July 95@4.12
Long 50 calls IBM APR 100@ 1.16

Reg T- $214,500
PM $ 4,638

:eek:

I think IV Trader needs to give a seminar on doing RC's

ps before anyone jumps all over me I do know that non-conforming long condors don't equal RC's... however a rather vivid example of the new BP we could have

 

[RichardRimes]

another possible use for PM?

http://elitetrader.com/vb/showthread.php?s=&threadid=62104&highlight=Combo+to+fly+conversion

 

[IV_Trader]

Quote from RichardRimes:



I think IV Trader needs to give a seminar on doing RC's

way ahead of you , RR...First seminal will be at rallymore studio apartment. Hurry up , the space is limited ( literally , lol)

 

[deviltrader]

Quote from RichardRimes:

AZD brought this back up as those using TOS will be getting PM next week.

Don't count on it. I know people like TOS, but their release date projections are as accurate as Microsoft's.

 

[RichardRimes]

well...its not something they told me in "confidence" its published on their website as of today thus I believe they are committed...oh and I don't know anyone quite like the people at TOS...been with them for 2 years and far and away the best broker we have been/dealt with.

What is the going rate IV? any discount for us ET or fattailers?