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