Can someone explain to me how option pricing works? Let's say that there is this imaginary stock, let's call it DICK:
Now, DICK is worth 95$ right now, and there's a call with a strike price of 100$ for March/2017. Let's say I buy an option worth 40 cents. Now let's say that DICK gets to 100$, but it does so in January, 2 months before the strike date. How much would my option likely be worth if I were to sell it 2 months early, even though it's hit the price? (Ignore the spread for this example)
>can you further explain gamma? Gamma measures the change in the delta for a $1 change in the underlying. This is really the rate of change of the options price, and is most closely watched by those who sell options, as the gamma gives an indication of potential risk exposure if the stock price moves against the position.
>Why would anyone check the vega? Vega is the option's sensitivity to changes in implied volatility. A rise in implied volatility is a rise in option premiums, and so will increase the value of long calls and long puts. Vega increases with each expiration further out in time. People keep track of it in order to keep track of the premiums on option positions.
Grayson Cruz
>Ok, let's say DICK reaches 100.01$.
You're down -$3.99 now instead of $4.00.
You aren't going to make any money until DICK hits a price $104.01
Leo Davis
BULL FUCKING SHIT
Do not listen to this dumbass OP. Your option value is comprised of two factors:
>Exercise/Intrinsic Value >Time Value
An option is a decaying asset -- as you approach expiration, your time value will always DECREASE.
Now, you have a situation where the stock price increased. An increase in stock price will increase part of the value of a call option. However, we have no idea if it's enough to offset the decrease in time value.
If you truly want to calculate the value of the call, stop asking the clueless NEETs here and go find a usable B/S model to toy around with.
Matthew Howard
lol no
Luke Torres
1/2 It's pretty much models vs real life. I sit next to the desk that works a lot with interest rate options, so I have some real life insight.
Regarding the gamma - First let's go back to delta. Delta tells us how much the premium will change, if price of the underlying moves by 1. Gamma tells us how much delta will change if the price of underlying moves by 1. Gamma is the first order derivative of delta.
Now let's explain how it works in real life. If let's say you have a call option with strike 100, but the current price of underlying is let's say 20 - you are very deep out of the money. Probability that option will be even worth anything is close to zero. So even if the price moves up to 30, it's still out of the money, even if underlying moved by 10. Delta is still very close to 0 and option is pretty worthless. Movement of the price of underlying by 10 gave almost no change in premium
Now let's say underlying is 150. You are very deep in the money and your option is worth a lot. If you have executed it now - you'll cash in 50 dollars. Now suddenly if price goes down to 140, premium will also to some value around 40. See? Option is deep in the money and movement of underlying by 10 makes the price of option move by almost 10 too.
That means that delta is not constant and it depends whether we are in the money, at the money or out of the money. And this changes of delta that depend of changes of the underlying and that's our gamma.
Regarding the gamma of the gamma - never heard about it in real life, maybe people who do some hardcore trading book risk management use it.
Isaac Collins
2/2 2. Vega is super important and a lot of the OTC options are not quoted in dollar premiums but they are priced with volatility
Now what does it mean? Vega tells us how much the premium of the option changes, if the volatility changes by 1 basis point.
What the hell is volatility? It's a pseud-measure of the risk of the underlying. The higher volatilty - the bigger price changes and it's more likely that your option will be called. If you take a look at the models - things needed to price the option are: price of the underlying, cash flows from the underlying, interest rates, time to maturity and volatility. Everything except the volatility can be read from the marke right away. Volatility has to be estimated by different measures. So when trading the option both of you will agree on the rice of the underlying, cash flows from the underlying, interest rates, time to maturity because these are not subjective. However you will not agree where you estimate your volatility at. Vega is a great measure here, because it let's you quickly calculate how much of the premium you will gain/loss if you agree to the volatility quoted by your counterparty.
Jaxon Campbell
Thanks for this.
1. Who dictates the value of the Vega, the seller? How could you trust them? 2. Any particular range in Vega to look out for/avoid? 3. Any good simulations to buy real market options from?
Jeremiah Allen
WHAT THE HECK IS TALKING HERE LOL
Jacob Lopez
Vega is a value from a model. Probably from some adjusted Black-Scholes model.
I'm Euro, so I don't follow regulated markets in US, however Chicago is the place where exchange-listed derivatives are, so look for some providers that have CME/CBOT listed derivatives in their offer.
Blake Walker
Anyone has numbers/info who is on the short and long in option trading? Is it investment funds, mom and pop investors, others? To me it seems more like a gambling tool for idiots than an investment vehicle. Please enlighten me.
Ayden Russell
interactive brokers has an option tool that will tell you how much it will be worth that day if the price moves 1%-30%. But to answer your question, it would be worth more than double what you paid for it, most likely.
