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By the closing bell
on Thursday March 12, 2009, the Option Greeks Table for IBM stock will
most likely look like the following:
Delta
Delta tells us
the rate of price change of an option with the price change of its
underlying stock. A delta of 0.54 indicates that for every $1.00
increase or decrease of the stock, the option will increase or decrease
by $0.54 per share. Notice the delta increases as the option goes deeper
in-the-money. It is normal to see a delta of 1 in very deep ITM options.
Gamma
Gamma tells us
how delta increases or decreases as the underlying stock rises or falls
in price. Mathematically, think of gamma as the second derivative of
delta. A gamma of 0.06 tells us for every $1.00 the underlying stock
increases or decreases in value, the delta will also increase or
decrease by 0.06.
Theta
Theta tells us
the rate of time decay with the passing of each calendar day. A
theta of 0.07 tells us the option will lose time value of $0.07 per
share, or $7.00 per contract, per day. Time value will erode more
quickly as expiration day approaches.
Option Greeks
tell us a general idea of option movement compared to the underlying
stock and also tell us the option diminishing value due to time decay.
Due to the other factors in the market such as volatility, and interest
rate, to name a few, option movement does not EXACTLY follow the Option
Greeks indicators. However, Option Greeks should give us a pretty good
idea of option movement compared to its underlying stock.
Dennis Phan 潘家墉
25
March 2009
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