Delta and in/at/out of the money horizontal, beginning, correct, middle

dirk01

The delta of a call option curve goes from 0 to 1. Would it be correct to say that:


- at the beginning of the curve (when the slope is nearly horizontal), the call option is far out of the money or deep in the money (not sensitive to stock price changes)

- at the end of the curve (when the slope is very steep), the call option is at the money (very sensitive to stock price changes)

- somewhere along the middle of the curve, the call option is slightly in the money or slighty out of the money.


Thanks.

KungFuPanda

it is at the money where the slope starts moving outwards at 45 degrees.

Left extreme - delta = 0, far out the money

extreme right -> delta = 1, far in the money.
0.............+1
............./
........... /
---------/
out....at....... in

this is for a long option.

CP



Edited 1 time(s). Last edit at Sunday, May 9, 2010 at 07:40PM by cpk123.

chaojimali

cpk,

i dont agree. the call option value is most sensitive to price changes when it hovers aroudn the strike price (i.e. at the money). when it is far far in the money, a small change in stock value wont affect the call value much.

so the right extreme of the graph (where the call option value changes the most per unit of stock price change) should be at the money no?

CPATrader

the show NY Wrote:
-------------------------------------------------------
> cpk,
>
> i dont agree. the call option value is most
> sensitive to price changes when it hovers aroudn
> the strike price (i.e. at the money). when it is
> far far in the money, a small change in stock
> value wont affect the call value much.
>
> so the right extreme of the graph (where the call
> option value changes the most per unit of stock
> price change) should be at the money no?

The curriculum states gamma is greatest at the strike price. For a call, delta approaches +1 as it gets deeper in the money. For a put, delta approaches -1 when it is deep in the money.

NO EXCUSES

Sportsman

bp-- what I have written is correct isn't it?

CP

SFoyil

Definition for a call option which is in the money would be strike price below the market price.

Let's say for a call option deep in the money where Stock = $10 and strike (X) = $5.
Thus the option should be priced close to $5 to prevent arbitrage.

When stock moves up by $1 to $11 the option price should move up by $1 also to bring the total cost of conversion to be ~$11. Thus delta =1

maryli

edit:

nevermind



Edited 1 time(s). Last edit at Monday, May 10, 2010 at 10:22AM by kurupt1.