what is the connection between the nominal underlying price and and risk profile
- Thread starter OTCkrak
- Start date
The strike increments are not really a basis for measuring risk, but more of a listing convention by the exchanges.
While you were looking at percentage moves to touch the strike, that is a one dimensional view of option prices. The closest thing you are thinking of is the Greek called Delta. Delta is simply defined as the option sensitivity to changes in the underlying.
By looking at delta instead of the price/strike relationship, you can normalize the two different contracts and compare the option prices as if they were indexed to 100.
However, I do recommend you review your Greeks. There's so much more to it.
While you were looking at percentage moves to touch the strike, that is a one dimensional view of option prices. The closest thing you are thinking of is the Greek called Delta. Delta is simply defined as the option sensitivity to changes in the underlying.
By looking at delta instead of the price/strike relationship, you can normalize the two different contracts and compare the option prices as if they were indexed to 100.
However, I do recommend you review your Greeks. There's so much more to it.
Coming to real underlying price - no harm with this because it shows already executed order or happened transaction or atleast fixed up price. In risk profile it all depends on how an induvidual calculates the risk. There are certain other factors that influence risk profile, general factors are as follows:
Is capital preservation more important to you than outpacing inflation?
Are you willing to accept fluctuating values when investing for the long term?
Are you more comfortable with dividends and income, or with growth through capital appreciation?
Will you accept above-average risk to generate above-average returns?
Is capital preservation more important to you than outpacing inflation?
Are you willing to accept fluctuating values when investing for the long term?
Are you more comfortable with dividends and income, or with growth through capital appreciation?
Will you accept above-average risk to generate above-average returns?
well the question is a bit more complex..
a stock like NFLX or GOOG can move through numerous strikes during a trading day / week and the dynamics of the greeks change when an option goes into the money.
for a $10 dollar stock with strike prices at 50 cent intervals (5% move).. only a few strikes are "in play" realistically.. my point is that high priced stocks are more interesting to trade options for this reason.. just trying to quantify this observation.
a stock like NFLX or GOOG can move through numerous strikes during a trading day / week and the dynamics of the greeks change when an option goes into the money.
for a $10 dollar stock with strike prices at 50 cent intervals (5% move).. only a few strikes are "in play" realistically.. my point is that high priced stocks are more interesting to trade options for this reason.. just trying to quantify this observation.
