Hi there Ron,
My apologies for not having responded to your post last night. I was exhausted and had a glass or two wine, so the answer was temporarily unavailable. <g>
You had asked about how the volatility in a stock effects the delta, and hence the option price. The answer is that the Black-scholes equation, on which standardized options are based, figures in the volatility, time to expiration, price of the underlying stock, as well as interest rates and any dividends, to come up with a determination of options pricing.
What I know, and find comes in handy, is that increased volatility in the underlying leads to increased option prices, so if, say, you want to go long an issue at that point, selling a put may be preferable to buying a call, because the juiciness of the premium is to your advantage as the seller. Or you could do both and put on a synthetic long.
I'm re-reading your question at this point and now realize that I misspoke when I wrote "delta". I meant "premium". No wonder you asked! I believe delta is only a function of the relationship between the price of the underlying with regard to the strike price of the option and doesn't factor in time and volatility. Would someone more knowledgeable than I about the greeks help me out? |
