Options Trading VIII Gamma: Hedgingstrategy

This publication is part of a series of posts on the Greeks. These posts are a short summary of a part of the content of my book How to Calculate Options Prices and Their Greeks. In the previous publication we’ve shown the difference in performance between the ‘tight’ hedger and the ‘wide’ hedger. The tight hedger was called the prudent trader; he was hedging his full gamma (2,000/ $) each dollar higher in the underlying, a trending asset which moved from $ 50 towards $ 55. T

The Vega Riddle: The Solution!

Last Week I published a riddle on vega: If a call with a theoretical value of 1.82 has a vega of 0.06 and the Implied Volatility rises one percentage point from, say, 17 percent to 18 percent, the new theoretical value of the call will be 1.88 – it would rise by 0.06, the amount of the vega. If, conversely, the IV declines 1 percentage point, from 17 to 16 percent, the call value will drop to 1.76 – that is, it would decline by the vega. My question to you was: When interest

The Vega Riddle

Dear Options addicts, experts, traders and others being interested in option theory, Last week I was reading a book (about options of course) and a passage on vega struck me. The following text was written: If a call with a theoretical value of 1.82 has a vega of 0.06 and the Implied Volatility rises one percentage point from, say, 17 percent to 18 percent, the new theoretical value of the call will be 1.88 – it would rise by 0.06, the amount of the vega. If, conversely, the

Options Trading VII, Gamma What does the Number say

This publication is part of a series of posts on the Greeks. These posts are a short summary of a part of the content of my book How to Calculate Options Prices and Their Greeks As shown in previous publications, gamma trading is based on the change of the delta of an option in relation to a change in the underlying level. The Delta The delta of an option can be seen as equivalent to the amount of underlying shares/ futures represented by this option. For instance, for an opt

Options Trading VI, Gamma Distribution in relation to Time

This publication is part of a series of posts on the Greeks. These posts are a short summary of a part of the content of my book How to Calculate Options Prices and Their Greeks. In Options Trading V, Gamma Distribution in relation to Volatility, we’ve shown how the Gamma changes at different Volatility levels. As a rule of thumb we can say: For at the money options: the higher the Volatility, the lower the Gamma For out of the money options: the higher the Volatility, the hi

Options Trading V, Gamma Distribution in relation to Volatility

This publication is part of a series of posts on the Greeks. These posts are a short summary of a part of the content of my book How to Calculate Options Prices and Their Greeks. In options Trading IV, we’ve shown how the change of the Delta of an option (i.e. the Gamma) can be employed to generate a certain profit. Hedging these Delta changes is called Gamma trading. In the chart above is shown how the Delta of a 50 call changes at different levels in the underlying. The per

Options Trading IV, Velocity of the Delta

This publication is part of a series of posts on the Greeks. These posts are a short summary of a part of the content of my book How to Calculate Options Prices and Their Greeks. In the previous two articles, we’ve discussed how the Delta of an option changes in relation to Volatility and Time to Maturity. As a conclusion there were two rules of thumb (for around the at the money options): The lower the Volatility the faster the delta changes: The shorter the Time to Maturity

Options Trading III, Delta versus Volatility

This publication is part of a series of posts on the Greeks. These posts are a short summary of a part of the content of my book How to Calulate Options Prices and Their Greeks. In the previous post, Delta versus Time to Maturity, we’ve discussed how the delta changes in relation to time to expiry. As a rule of thumb one can say, the longer the time to maturity the longer it takes for the delta to grow from 0% to 100%. The shorter the time to maturity, the earlier this will h

Options Trading II, Delta versus Time to Maturity

This publication is part of a series of posts on the Greeks. These posts are a short summary of a part of the content of my book How to Calulate Options Prices and Their Greeks. In the previous post, Delta, we’ve discussed the delta distribution as presented in the most books and articles on the internet. When referring to a 50 call, its delta is eitherway 0%, when the underlying is below 50, or 100%, when the underlying is above 50, as shown below: The delta however, during

Options Trading I, Delta

This publication is part of a series of posts on the Greeks. These posts are a short summary of a part of the content of my book How to Calulate Options Prices and Their Greeks. The Delta is the first derivative of the value of an option: or the change of the value of the option as compared to the change of the Future or underlying value. For a call option one can expect the value of that option to increase when the underlying will move up; at the same time a decrease of the