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Flashcards in THE GREEKS Deck (25):
1

BSM Formula Inputs

1. S- asset price (delta)
2. Volatility- Vega
3. Interest Rate- Rho
4. Passage of TIme- Theta
5. X- exercise price
6. Gamma- rate of change in delta as stock price changes

2

Delta and Calls

Positively Related
Delta > 0

Measures change in call price for $1 change in underlying.
Prices up 1, Delta of 0.5, call price expected to move 50 cents.

3

Delta and Puts

Negatively Related
Delta < 0

4

Vega and Calls

Positively Related
Vega > 0

Higher volatility always positively impacts price of options

5

Vega and Puts

Positively Related
Vega > 0

6

Rho and Calls

Positively Related
Rho > 0

As rates increase, call values increase

7

Rho and Puts

Negatively Related
Rho < 0

As rates decrease, put values decline.

8

Theta and Calls

Value - > $0 as call -> maturity.

Negatively related

Theta < 0

9

Theta and Puts

Value - > $0 as put -> maturity.

Positively related

Theta < 0

10

Theta's input

passage of time

11

Delta's input

Asset price

12

Vega's input

Volatility

13

Rho's input

risk-free rate

14

Delta Def

Change in price of an option for a 1 unit change in price of underlying stock.

15

Far out of the money call, delta approaches

0

16

Far in the money call, delta approaches

e^(-dividend yield*T)

17

Far out of the money put, delta approaches

0

18

Far in the money, put delta approaches

-e^ (-dividend yield*T)

19

Dynamic Hedging/Delta Neutral Hedging

Combining a long stock position with short calls so portfolio value doesn't change with stock price.

# of short calls needed = # shares hedged / Delta of call

Delta < 1 so always need more calls than shares.

20

Dynamic Hedge Formula

# of short calls needed =

# shares hedged / Delta of call

21

Gamma

rate of change in delta as stock price changes

positive for both calls and puts

largest when option is ATM and close to expiration

Small for deep ITM and deep OTM options not close to expiration

22

Gamma and Calls

Positively related

23

Gamma and Puts

Positively related

24

Gamma risk

when stock price jumps abruptly (a violation of BSM assumption)

25

Implied volatility

of continuous returns on underlying stock is "volatility" from BSM model that makes model value = market price

Volatility "implied" by option price.