Beruflich Dokumente
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Outline
Introduction
The Option Delta
The Option Gamma
The Option Theta
The Option Vega
The Option Rho
Position Greeks
Summary
Introduction
Objectives
This chapter introduces the sensitivity measures collectively called the option
greeks.
The objective is to understand:
The meaning of each greek (what is it measuring)?
The properties of the greek. For example:
When is it 'large" in value? What is the intuition for this behavior?.
Introduction
Options are instruments whose values are affected by many factors. Option
pricing models value options taking as given information about these factors
at a point in time.
As time passes, changes in the values of these factors (price of the
underlying, time-to-maturity, volatility, . . . ) will cause changes in option
values.
Sensitivity Analysis aims to quantify the impact of a change in each
factor on the option price.
Corresponding to each factor is a sensitivity measure (called the option
greek) that gives the quantitative (i.e., dollar) impact of a change in that
factor.
The Factors
The Greeks
Corresponding to these factors are five sensitivity measures or greeks:
1. Delta, denoted :
Measures impact of a "small" change in asset price.
2. Gamma, denoted :
Measures option curvature, and can be used to estimate impact of a "large"
change in asset price.
3. Theta, denoted :
Measures impact of the passage of time.
4. Vega, denoted
5. Rho, denoted :
Measures impact of change in the interest rate.
A Broad Overview
Simple Examples
Comments
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The term
estimated impact of the change dS, but its effect is particularly important for
large dS.
The gamma also has other uses discussed below.
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t : current time
S : current price of underlying
: volatility of underlying
T : maturity date of option (so time-left-to-maturity = T t ).
K : strike price of option
r : riskless interest rates (continuously compounded)
C, P : prices of call and put respectively.
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C = S N (d1) PV (K ) N (d2)
P = PV (K ) N (d2) S N (d1)
where N () is the cumulative standard normal distribution, and
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Definition
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1 P 0.
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Put-call parity:
C P = S PV (K ).
Differentiating both sides with respect to S :
(call) (put) = 1,
or, equivalently,
(call) +|(put)| = 1.
Intuitively, when S changes by a dollar, the left-hand side of put-call parity
too must change by a dollar.
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P = N (d1)
The figure on the next page plots call and put deltas in the Black-Scholes
setting.
Parameter choices same as those used earlier in plotting call and put
prices.
K = 100.
T t = 0.50.
r = 0.05.
= 0.20.
S varies from 72 to 128.
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dC = C dS
dP = P dS
For example, suppose a put is trading at $11.45 and has a delta of 0.70.
Suppose the price of the underlying increases by $0.50.
Then: dS = +0.50 and P = 0.70, so the estimated change in the put
value:
(0.70) (+0.50) = 0.35.
Estimated new put value: 11.45 0.35 = 11.10.
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C = 6.889
C = +0.598
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For a change of dS = +1, the delta estimates that the call price should
change by
dC = C x dS = +0.598.
That is, the new call price at S = 101 should be
6.889 + 0.598 = 7.487.
In fact, if we use the Black-Scholes formula to calculate the new price at
S = 101 with the other parameters unchanged, we get C = 7.500.
Thus, the estimated and actual values differ only by just over a penny.
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However, the delta becomes progressively less accurate for "large" dS.
Consider the same value of S = 100, but a larger change of dS = +5.
Using the delta, the estimated change in the call value is
(0.598)(+5) = +2.990.
Thus, the estimated new price at S = 105 is 6.889 + 2.990 = 9.879.
Actual new price at S = 105 according to the Black-Scholes formula:
C = 10.201.
The delta underestimates the change by 0.32 or over 10%.
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C P = S PV (K ).
we have already seen that
(call (put) = 1.
It follows that
(call) (put) = 0,
or
(call) = (put).
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dC = a
A more accurate estimation of the change is obtained by
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C = 6.889
= 0.598
= 0.0274.
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As we saw above, using the delta alone leads to a large error in estimating
the price change:
The estimated new price is 9.877.
The actual new price from the Black-Scholes formula is 10.201.
Using the curvature correction formula, the new price estimation is:
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Thus, a delta-hedged position in which you are short the option will lose
money from an unanticipated change in prices regardless of the direction in
which the price moves.
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dC = C dS.
For example, at S = 100, we have C = 0.598 and C = 0.0274.
Taking dS = 4, the estimated values of delta at S = 96 and S = 104 are
(96) = 0.489
(104) = 0.707.
These are quite close to the actual values of (96) = 0.484 and
(104) = 0.700.
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Final use of option gamma: indicator of the frequency with which a delta
hedge needs to be rebalanced.
"Small" delta does not change much for changes in S.
Thus, a delta hedged position will remain approximately delta hedged even as
S changes.
Large even small change in S can create a substantial change in the
delta.
Thus, a delta-hedged position may become risky following changes in S and
the hedge will have to be rebalanced more frequently.
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Definitions
Let t denote the current time and T the maturity date of the option.
Then, the theta is defined by
Intuitively, these expressions measure the change in the option values for a
small move forward in current time (i.e., for a small reduction in the timeto-maturity).
Theta is often referred to as the time-decay in an option.
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Properties
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Theta is
Least important (smallest in absolute value) for deep OTM options.
Somewhat more important for deep ITM options.
Most important for ATM/NTM options.
This is reflected in the graphs on the next page.
Intuition?
Time matters through the insurance value and time value of an
option.
How do these depend on moneyness?
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The option theta estimates that for a given change dt, the change in option
values is given by
dC = c dt
dP = p dt
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Intuitively, the vega measures the impact on call and put values of a small
increase d in current volatility.
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P.
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The Vega
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d .
= 25.36.
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Options are securities with deferred payoffs, so their values are affected by
the rate of interest.
The option rho measures the sensitivity of option prices to changes in
interest
rates.
The rho is denoted and is defined by
Intuitively, the rho measures the impact on call and put values of a small
increase dr in the risk-free rate.
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Properties
Interest rates affect option prices through the time value factor.
The time value of a call is positive, but that of a put is negative.
Therefore:
The rho of a call is positive (C if r ).
The rho of a put is negative (P if r ).
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c = e r (T t )KN (d2)(T t ).
(1)
p = er (T t )KN (d2)(T t ).
(2)
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For a given dr, the rho estimates that option prices will change by c dr.
Formula works well for "small" dr.
E.g., at S = 100 and r = 0.05: C = 6.889 and = 26.44.
Consider a change of 25 basis points: dr = 0.0025.
Estimated change in call value: (26.44)(0.0025) = 0.0661.
Thus, the estimated call prices: C [r = 0.0475] = 6.823 and
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Position Greeks
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Position Greeks
The greeks are easily extended from individual options to portfolios consisting
of options and the underlying.
The position greek is simply equal to the sum of the greeks of each option
weighted by the number of options, plus the sensitivity of the under lying to
that parameter.
For example, the position delta is the sum of the deltas of each option in
the portfolio weighted by the number of options of each type) plus the
delta of the position in the underlying in the portfolio.
In this process, note that:
The delta of the underlying is equal to +1.
The gamma, vega, and rho of the underlying stock are all equal to zero.
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Summary
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Summary
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