Re: Options Strategies and Discussions (Nov 09 to Mar 10)
Posted: Sun Nov 22, 2009 3:14 pm
I guess somebody should give you face for the effort you put in to educate us.
As usual, after losing buying those SPY put options recently, I have been reading up on options. So, here are my answers. Took me some time as I had to constantly refer back to my book.
Answer: (b)
Call options are out-of-money. Delta is also interpreted as probability of expiring in-the-money. Nearer the expiration date, lower the probability for out-of-money call options to expire in-the-money. Hence, nearer the expiration, lower the delta for out-of-money options.
Answer: (d)
This is in-the-money put option. Gamma is rate of change of delta with respect to change in underlying price. When expiry date nears, one becomes more certain that in-the-money options should stay in-the-money as there is lesser time for the option to move out-of-money. Hence, delta should be more stable as expiry date nears. Hence, Gamma should be lower for near-expiry options to give a more stable delta.
Answer: e
Theta reaches its peak for at-the-money option.
Answer: h
As expiry nears, the impact that vega has on the option price should be lesser as there is less time for volatility to swing the option to the other end. Hence, as expiry date nears, vega becomes smaller.
As usual, after losing buying those SPY put options recently, I have been reading up on options. So, here are my answers. Took me some time as I had to constantly refer back to my book.
MCQs :
SPY is at 109.82 on 19Nov09
a) Delta of (Dec09 105 Call) > Delta of (Feb2010 105 Call)
b) Delta of (Dec09 105 Call) < Delta of (Feb2010 105 Call)
Answer: (b)
Call options are out-of-money. Delta is also interpreted as probability of expiring in-the-money. Nearer the expiration date, lower the probability for out-of-money call options to expire in-the-money. Hence, nearer the expiration, lower the delta for out-of-money options.
c) Gamma of (Dec09 100 Put) > Gamma of (Feb2010 100 Put)
d) Gamma of (Dec09 100 Put) < Gamma of (Feb2010 100 Put)
Answer: (d)
This is in-the-money put option. Gamma is rate of change of delta with respect to change in underlying price. When expiry date nears, one becomes more certain that in-the-money options should stay in-the-money as there is lesser time for the option to move out-of-money. Hence, delta should be more stable as expiry date nears. Hence, Gamma should be lower for near-expiry options to give a more stable delta.
e) Theta of (Feb09 110 Call) > Theta of (Feb09 100 Call)
f) Theta of (Feb09 110 Call) < Theta of (Feb09 100 Call)
Answer: e
Theta reaches its peak for at-the-money option.
g) Vega of (Dec09 108 Put) > Vega of (Feb2010 108 Put)
h) Vega of (Dec09 108 Put) < Vega of (Feb2010 108 Put)
Answer: h
As expiry nears, the impact that vega has on the option price should be lesser as there is less time for volatility to swing the option to the other end. Hence, as expiry date nears, vega becomes smaller.