In this workout we're told, using the following information, answer the questions below, and they're at the bottom here.
Eg. What is the highest delta? We've got three options. Options. 1, 2, 3.
We're told they're all put options, but they've got varying strike prices, varying maturity dates, and we're then told the current stock value and the current date.
So in order to help us answer these questions such as which one has the highest delta, let's do a quick recap of what each one means.
For put options. Delta is negative because as the stock price rises, the puts becomes less valuable.
Well, let's have a quick think. We've got option three here.
Option three has a strike price of 28.
Oh wow. That's really valuable. That option because the strike price of 28 means you could sell at 28, buy at 25.
This option is very, very valuable.
As the stock price of 25 went up to 26, 27, 28, the put becomes less valuable.
Option three would have a very negative delta, very close to minus one.
So that's the answer to our second question here. Which one has the lowest delta? The most negative? That's going to be option three.
If we go down to the second one, which has the lowest delta, most negative, that is option three.
If we have a quick read, deltas are lower.
IE more negative for put options that are in the money.
So our highest delta, the least negative, must be the one that's in the opposite situation.
That is option one. Option one. Very much outta the money.
The stripe price is 22. The current stock value is 25.
This is outta the money. So option one, deltas are higher.
IE closer to zero for put options that are outta the money.
So the delta here would be maybe minus 0.1 minus 0.2.
What's about Vega? Let's have a quick reminder of Vega.
Vega is how sensitive the options price is to changes in implied volatility.
It's always positive for both calls and puts.
Well, if we have a quick think about which one of these three options might be the most volatile or might have the most implied volatility.
It's going to be something that's at the money.
If we have a look at what else we're told about Vega, it is highest for at the money options and long dated options.
Option two, the stripe price is 25 and the current stock value is 25. That's very much at the money.
There's lots of potential for volatility to change the value Here. If the stock price were to go slightly up or slightly down, that's dramatically going to change the value of this option.
So we're being asked for the lowest figurer.
It's definitely not option two.
We're then told it is highest for long dated options.
Our longest dated option here is option three and option two they have the same dated option, so it's not going to be option three.
My lowest Vega is going to be for option one.
It's got the shortest maturity.
It's in August year 20 rather than December year 20, and it's not at the money.
So our lowest Vega option one Vega, is lower for options with shorter time to expire.
Lastly, we're asked about theater.
A quick reminder of theater tells us that theater measures time decay, IE, how the options price falls each day.
The larger the magnitude of theater, more negative, the faster the option is decaying.
Here we go. This happens with options at the money and or close to time expiry.
We're looking for the one that is least negative, the one that doesn't have much theater going on, so close to time expiry.
Well that's option one.
Option one has maturity date or time expire in the 1st of August.
That's definitely the closest out of all of them.
We're not after a nice low, very negative theater.
We're after a higher theater, least negative, so it can't be option one.
We're also told the faster the option decaying happens with options at the money.
Again, that's option two.
The strike price of 25 matches the stock value of 25.
That's very much at the money. There's lots of value left in this option.
Therefore it must be option three.
Theta is least negative for options where the option loses value.
The slowest IE, the longest time to expiry and where the option is deepest in or outta the money.
This is very much looking at option three.
