Documente Academic
Documente Profesional
Documente Cultură
B. B. Chakrabarti
Professor of Finance
1 2
* s
* t
* r
* * 2 * s 2
s
t
r
2 s
1
* s * t * r * * * s 2
2
B. B. Chakrabarti: bbc@iimcal.ac.in
Delta
Delta () is the rate of change of the option price with respect to
the underlying.
If c is the price of the call option and S is the stock price,
then,
Option
price
c
S
Slope =
B
A
Stock price
B. B. Chakrabarti: bbc@iimcal.ac.in
Delta
Delta denotes the movement of the option position
relative to the movement of the underlying position.
So, Delta is the speed of change of option value when
underlying asset value changes.
Delta is another way of expressing the probability of
an option expiring in the money.
ATM call options have a Delta of 0.5 or 50% meaning
a 50% chance of expiring ITM.
Deep ITM call will have a Delta of 1 meaning a 100%
chance of expiring ITM.
Deep OTM call will have a Delta close to zero meaning
a near zero chance of expiring ITM.
B. B. Chakrabarti: bbc@iimcal.ac.in
Delta
Delta Range
Long call
0 to 1.00
Short call
0 to -1.00
Long put
0 to -1.00
Short put
0 to 1.00
Delta Range Rules of Thumb (Long Call)
Deep-in-the-money
0.75 to 1.00
Slightly-in-the-money
0.55 to 0.75
At-the-money
0.45 to 0.55
Slightly-out-of-the-money
0.25 to 0.45
Deep-out-of-the-money
0 to 0.25
Delta of long stock is 1 and -1 for short stock.
B. B. Chakrabarti: bbc@iimcal.ac.in
Position Delta
Position Delta or Delta of a portfolio of options or
other derivatives dependent on a single asset whose
price is S and the value of the portfolio is is
10
11
B. B. Chakrabarti: bbc@iimcal.ac.in
12
Theta
Theta () of a derivative (or portfolio of derivatives) is
the rate of change of the value with respect to the passage
of time.
f
of a call or put
t
13
14
15
Theta Example
Consider a four-month put option on a stock index. The
current value of the index is 305, the strike price is 300, the
dividend yield is 3% per annum, the risk-free interest rate is
8% per annum, and the volatility of the index is 25% per
annum.
In this case So = 305, K = 300, q = 0.03, r = 0.08, = 0.25, and T =
0.3333.
qS 0 N (d1 )e qT rKe rT N (d 2 )
2 T
= 18.15
= 18.15/365 = -0.0497 per calendar day
= 18.15/252 = -0.0720 per trading day
B. B. Chakrabarti: bbc@iimcal.ac.in
16
Gamma
Gamma () is the rate of change of delta () with
respect to the price of the underlying asset.
S S 2
If gamma is small, delta changes slowly, and
adjustments to keep a portfolio delta neutral need to be
made only relatively infrequently.
If gamma is large in absolute terms, delta is highly
sensitive to the price of the underlying asset.
B. B. Chakrabarti: bbc@iimcal.ac.in
17
Gamma
Gamma can be viewed in two ways.
a) as the acceleration of the option position relative to
the underlying stock price.
b) as the odds of a change in Delta.
Gamma is effectively an early warning that Delta could be
about to change.
Both calls and puts have positive Gammas.
Deep OTM and deep ITM options have near zero Gamma
because the odds of a change of delta are very low.
Logically Gamma tends to peak around the strike price.
B. B. Chakrabarti: bbc@iimcal.ac.in
18
Call
price
C''
C'
C
Stock price
S
S'
B. B. Chakrabarti: bbc@iimcal.ac.in
19
Interpretation of Gamma
For a delta neutral portfolio,
t + S 2
S
S
B. B. Chakrabarti: bbc@iimcal.ac.in
20
S
S
B. B. Chakrabarti: bbc@iimcal.ac.in
21
22
23
Calculation of Gamma
For a European call or put on non - dividend paying stock :
N ' (d1 )
S0 T
ln(S 0 / K ) (r 2 / 2)T
where d1
T
For a European call or put on asset paying dividend at rate q :
N ' (d1 )e qT
S 0 T
ln(S 0 / K ) (r q 2 / 2)T
where d1
T
B. B. Chakrabarti: bbc@iimcal.ac.in
24
Gamma Example
Consider a four-month put option on a stock index. The
current value of the index is 305, the strike price is 300,
the dividend yield is 3% per annum, the risk-free interest
rate is 8% per annum, and volatility of the index is 25%
per annum.
In this case, So = 305, K = 300, q = 0.03, r = 0.08, =
0.25, and T = 4/12.
The gamma of the index option is given by
N ' (d1 )e qT
S T =0.00857
0
25
1 2 2 2
rS
S
r
2
t
S 2
S
;
S
S 2
1
Hence, rS 2 S 2 r
2
For neutral portfolio,
But,
;
t
1
2 S 2 r
2
B. B. Chakrabarti: bbc@iimcal.ac.in
26
1 2 2
(r q ) S S r
2
B. B. Chakrabarti: bbc@iimcal.ac.in
27
Vega
Vega () is the rate of change of the value of a
derivatives portfolio with respect to volatility.
28
Calculation of Vega
For a European call or put on non - dividend paying stock :
S0 T N ' (d1 )
ln(S 0 / K ) (r 2 / 2)T
where d1
T
For a European call or put on asset paying dividend at rate q :
S0 T N ' (d1 )e qT
ln(S 0 / K ) (r q 2 / 2)T
where d1
T
B. B. Chakrabarti: bbc@iimcal.ac.in
29
B. B. Chakrabarti: bbc@iimcal.ac.in
30
Rho
Rho is the rate of change of the value of a
derivative with respect to the interest rate.
rho
r
- rt
B. B. Chakrabarti: bbc@iimcal.ac.in
31
Rho
Rho stands for the option positions
sensitivity to interest rates.
A positive Rho means that higher interest
rates are helping the position and a negative
Rho means that higher interest rates are
hurting the position.
Rho is the least important of all the Greeks
as far as stock options are concerned.
B. B. Chakrabarti: bbc@iimcal.ac.in
32
B. B. Chakrabarti: bbc@iimcal.ac.in
33
+
-
B. B. Chakrabarti: bbc@iimcal.ac.in
+
-
34
Hedging Principle
n
For neutrality, p wi i 0
i 1
For neutrality, p wi i 0
i 1
n
For neutrality, p wi i 0
i 1
B. B. Chakrabarti: bbc@iimcal.ac.in
35
Hedging in Practice
Traders usually ensure that their portfolios
are delta-neutral at least once a day.
Whenever the opportunity arises, they
improve gamma and vega.
As portfolio becomes larger hedging
becomes less expensive.
B. B. Chakrabarti: bbc@iimcal.ac.in
36
Scenario Analysis
A scenario analysis involves testing the
effect on the value of a portfolio of
different assumptions concerning asset
prices and their volatilities.
B. B. Chakrabarti: bbc@iimcal.ac.in
37
Portfolio Insurance
Portfolio insurance is done by buying a
put option on the portfolio.
One approach is to buy put options on a
market index or to create the options
synthetically.
This involves initially selling enough of
the portfolio (or of index futures) and
the proceeds invested in a riskless asset
to match the of the put option.
B. B. Chakrabarti: bbc@iimcal.ac.in
38
B. B. Chakrabarti: bbc@iimcal.ac.in
39
40
41
N (d 2 ) 0.4998
e
0.3969
2
2
B. B. Chakrabarti: bbc@iimcal.ac.in
42
4.206
S T
0.80 * 0.15 * 0.5833
The vega of one call option is
S0 T N ' (d1 )e rf T 0.80 0.5833 * 0.3969 * 0.9713 0.2355
The theta of one call option is
S0 T N ' (d1 )e rf T
rf S0 N (d1 )e rf T rKe rT N (d 2 )
2 T
0.8 * 0.3969 * 0.15 * 0.9713
2 * 0.5833
0.05 * 0.8 * 0.5405 * 0.9713 0.08 * 0.81* 0.9544 * 0.4948 0.3933
B. B. Chakrabarti: bbc@iimcal.ac.in
43
0.2231
Interpretation of Delta : When the spot price increases
by a small amount (measured in cents), the value of an
option to buy one yen increases by 0.525 times that
amount.
Interpretation of Gamma : When the spot price increases
by a small amount (measured in cents), the delta
increases by 4.206 times that amount.
B. B. Chakrabarti: bbc@iimcal.ac.in
44
B. B. Chakrabarti: bbc@iimcal.ac.in
45
46
47
B. B. Chakrabarti: bbc@iimcal.ac.in
48
-1,000
0.5
2.2
1.8
Call
-500
0.8
0.6
0.2
Put
-2,000
-0.4
1.3
0.7
Call
-500
0.7
1.8
1.4
49
50
51
52