Chapter7 - Chapter Seven Option Greeks Answers to Problems...

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Option Greeks Answers to Problems and Questions 1. Delta is the hedge ratio, a measure of option sensitivity, and sometimes approximately the likelihood of the option ending in the money. 2. As time passes, the delta of an in-the-money option approaches one. Call option deltas are less than one, so an in-the-money call delta must rise with the passage of time, everything else being equal. 3. With a striking price of zero, the call option would behave exactly like the stock. Its delta would therefore be 1.0. 4. Some strategies are constructed based upon a neutral outlook on the market. If the position delta is not zero, then the position has an initial bullish or bearish bias. 5. With European options, the sum of the call delta and the put delta is one. This is approximately the case with American options. As time passes, the call delta will approach 0.5 and the put delta will approach –0.5. The sum of the two (the position delta) will not change, however. 6. In some circumstances delta is a useful measure of the approximate likelihood that the underlying asset will finish in-the-money. This means that profit and loss diagrams can be annotated with the likelihood of reaching various profit levels, especially those that are substantially in- or out-of-the- money. 7. Long options have negative deltas by convention simply because the time remaining with a particular option can only decrease. Time can pass, but you cannot go back in time. 8. The lower the striking price, the higher the delta for a call option. A bull spread involves buying the low striking price (with a higher delta) and writing the high striking price (with a lower delta). This means the position delta for a vertical bull spread will always be positive. 9. With little time remaining until expiration, the likelihood increases that an in- the-money option will remain in-the-money (and act like the stock), and vice-versa with an out-of-the-money option. 24
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This note was uploaded on 01/31/2011 for the course ACCT 331 taught by Professor N/a during the Spring '10 term at Mountain State.

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Chapter7 - Chapter Seven Option Greeks Answers to Problems...

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