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Strategies & Market Trends : ajtj's Post-Lobotomy Market Charts and Thoughts
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To: Sun Tzu who wrote (83259)12/22/2023 9:24:31 AM
From: Qone0  Read Replies (2) of 97866
 
I see theta was ignored. <G>

>>Assume a trader is long one call of a stock, and the option has a delta of 0.6. That means that for each $1 the stock price moves up or down, the option premium will increase or decrease by $0.60, respectively. To hedge the delta, the trader needs to short 60 shares of stock (one contract x 100 shares x 0.6 delta). Being short 60 shares neutralizes the effect of the positive 0.6 delta.<<

This means the option is out of the money at a .60 delta. as the option comes into the money the delta will increase to almost 1 when it gets into the money.

At this point it will trade tick for tick with the underlying.

Gamma is the first derivative of delta and is used when trying to gauge the price movement of an option, relative to the amount it is in the money or out of the money. It describes how the delta will change as the underlying asset changes. So if an option's delta is +40 and the gamma is 10, a $1 increase in the underlying price would result in that option's delta becoming +50.

When the option being measured is deep in or out of the money, gamma is small. When the option is near or at the money, gamma is at its largest. Gamma is also largest for options with near-term expirations relative to longer-dated options.

To this I say Duh. <G>

So lets go over this Example.

The call option is out of the money, that's why the delta is .6, so you short 60 shares. The stock gradually comes into the money at which point you are short just under 100 shares.

And stays in the money until it expires, This hedge cost you as the theta burned totally away.

Where is the upside in this?

Give me a trade example in which this would work in the real world.
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