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Politics : Ask Michael Burke
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To: Knighty Tin who wrote (439)8/11/1996 10:08:00 PM
From: Enroff   of 132070
 
Exploring the math a bit more on the 45 vs 50 put for CPQ and James
Hopkins questions.
Delta for an option is the rate of change of the option price relative to the change in the stock price. It will vary with difference of the of the stock price and the exeercise price and the time to expiration. I dusted off my Black Scholes model and calculated the delta for the disscused puts.
Jan 50 put cpq, cpq at 57, delta = -.23
Jan 45 put cpq, cpq at 57, delta = -.12
This means that is cpq drops 1 point the jan 50 will rise .23 and the jan 45 will rise .12. The negative delta says the option price and the stock move in opposite directions.
The delta will approach 1 for a call or -1 for a put if the option is in the money and we are near expiration.
If we invest the same capital in the options the relative delta (my term) of the jan 45 will be -.23 x 2.125 / 1.25 = -.20.
Mike you can see we get more movement in the 50s to start with. Of course we will loose faster if it goes the other way.
I think we get more bang for the buck with the 50s unless we get a huge drop in cpq.
Rolling down means we will sell options that we have and replace them with options further out in time and usually at a price further from the current stock price. We take money of the table but the new options will have a lower delta and we will not make money as fast as we were with the old options. Most of the these comments are based on the assumption that we are making money on the options.
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