| Several methods can be used to estimate the price of | | | | A more volatile stock will usually have a lower gamma. |
| an option after a move in the price of the underlying | | | | Therefore, the more volatile the stock, the less its |
| stock. The most widely used method involves utilizing | | | | options deltas will either increase or decrease with |
| the "Greeks" to calculate the option price. | | | | each dollar move. This is because a move is more |
| The "Greeks" | | | | significant on a stable stock than one that is more |
| Mathematical equations have been developed to help | | | | volatile. |
| estimate how much an option premium will change as | | | | For example, a stable stock priced at 50 may see its |
| the underlying stock moves and time approaches | | | | 50 strike call increase in price from $2 to $2.50 when |
| expiration. These equations are commonly referred to | | | | the stock moves to 51 and increase to $3.20 when it |
| as the "Greeks' and they include, Delta, Gamma, Vega | | | | goes to 52. The delta for the first dollar move was.50, |
| and Theta. The following is a brief explanation of how | | | | increasing the option price fifty cents. The delta |
| they are used to estimate the change in option pricing. | | | | increased to.70 with the option price increasing by |
| Delta is a measurement that estimates how much an | | | | seventy cents when the stock moved to 52. The |
| option premium will increase or decrease with every | | | | option's gamma was therefore.20 as the delta |
| dollar movement in the underlying stock or index. An | | | | increased from.50 to.70. However, the more volatile |
| at-the-money option typically has a delta of | | | | stock trading at 50 may see its 50 strike call increase |
| approximately +/-.50 (+.50 for a call and -.50 for a put). | | | | from $4 to $4.50 when the stock moves to 51 and |
| This means, for the next dollar movement in the stock, | | | | then to $5.05 when it moves to 52. The delta for the |
| the option price will move approximately 50 cents. As | | | | first dollar move was.50 and the option premium |
| a stock moves up, the delta of a call option increases | | | | increased by fifty cents. When the stock moved to 52 |
| in value, and decreases as the stock moves down. | | | | the option premium increased by fifty five cents giving |
| The delta of a put option de-creases as a stock | | | | it a delta of.55. The option's gamma was therefore.05. |
| moves up and increases as the stock moves down. | | | | With a stock move from 51 to 52, the delta value of |
| The maximum delta an option can typically have is 1.0. | | | | the volatile stock's option moved from.50 to only.55 |
| This can happen when an option is in-the-money and | | | | when the stock went from 51 to 52, while the more |
| approaches expiration, that is, trading at parity. | | | | stable stock's delta moved from.50 to.70 when the |
| Gamma is a measurement that estimates the rate of | | | | stock priced moved from 51 to 52. |
| change in an option's delta for each dollar move in the | | | | In addition, the delta and gamma values will change as |
| underlying stock or index. Because stocks have | | | | an option moves closer to expiration. This rate of |
| different volatilities (measured by Vega), the gamma of | | | | change is estimated by measurement referred to as |
| a stock's options will vary from one stock to another. | | | | "Theta. |