FRM: Option delta

Delta is one of the option Greeks. It gives the sensitivity of the call option value to changes in stock price. In this example, a delta of 0.61 implies we can hedge a long position in 61 shares by writing (i.e., taking a short position in 100 call options. But note delta is a linear approximation; the hedge requires frequent rebalancing. For more financial risk videos, visit our website! http://www.bionicturtle.com

Comments

1. how to calculate delta for barrier option?
2. great info. Thanks Bionic Turtle. I use matlab instead of excel to do the plots. :D
3. Very nice.Thanks
4. Why is it called 'perfect hadge' when hedge value is reduced to 8 USD, and not to 0 USD?
5. where is spreadsheet?
6. hi David, the input data you used is never going to correct. for example, you mentioned current stock price and the strike price after one year is 10. how it is possibile in the reality? in that case every one will do short selling now and long on call option. That will simply give them interest rate profit.
7. where can I get the spreadsheet that you used?
8. Great explanation. So if an investor is writing a call at 10 and price moves up to 13, will the investor have to add more long shares to keep portfolio hedge neutral?
9. Most stock options in the US markets are American, does Black Scholes model still apply?
10. @purelanpurelan looking for the answer too if u know, let me know please
11. they wouldn't exercise for the exact reason you are giving: they can buy it in the market for cheaper, why would they want to exercise their option and force themselves to buy at a higher price?
12. the buyers of your call would find their calls getting less valuable, i.e. more out of the money. if they can buy the underlying at a cheaper price, they would NOT exercise their calls because exercise would require them to buy the stock at the strike price--not the underlying. The reason you lose money in this perfectly hedged trade is b/c of negative gamma, i.e. the fact that the delta of your option gets lower while your hedge is constant, which leaves you long a bit stock in a drop.
13. delta is 0.612, so it 61.2 shares, it is just rounded in display :)
14. I don't quite understand what is happening here. If the the price of the underlying decreases and i'm shorting my calls wouldn't the buyers of my call want to exercise their options? Since they can buy the underlying for a cheaper price? And how is 61 * 10 = 612?
15. Yes, that is correct, only difference is that your underlying exposure is short 10,000 options (100 share * 100 contracts), while my example above is 100 options (or 1 contract, if you like). IMO, best way to keep is straight is equalize the "position delta" (price * delta); eg, 100 options * 0.61 %delta = 61 shares * 1.0 %delta; or, 10,000 options * 0.61 = 6,100 shares * 1.0 delta
16. Hi bionic turtle really quick quesiton: I'm confused on the 61 share figure, because if you are short 100 call options contracts each representing 100 shares of XYZ shouldn't that be able to hedge a long position of 6100 shares of XYZ if delta is .61? Sorry if that's a stupid questions.
17. @winneryeahmate Great, thank you!
18. Good explanation, particularly to someone whose work has no real relevance to derivatives.
19. @3eyewisdom thats the new price of the call option once the stock price changes from $10 to $9 (which can be done by just changing the input assumptions) .. the call option goes from $1.38 to $0.831429
20. you're the best! you're singlehandedly getting me through my options class at this point.