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I am a relatively new trader (3 yrs.) who because of small acct. size
usually buys options. In an attempt to educate myself on just what I'm
up against, I studied the time behavior of several options different
amounts out of the money. To me this was quite revealing. For example,
I knew that the opt. price would go down with time but I did not know
that delta went down with time for options that were out of the money.
It also shows that generic rules like "always buy with 40 days left" may
really vary in their applicability depending on what option you are
talking about.
This table attempts to study whether out of the money options are a good
idea and when to liquidate options.
I think the table will be clear but for an example: a 100 call with 40
days to exp. will cost 3.28 and have a delta of 0.51 (51%).
Table constants futures = 100.00, volatility = 25%
entries are: option price*100, delta in %.
strke|days:....80.... .40........30........20........10.......5
95...........740,68...628,74....595,77...558,82....520,90...504,96
100..........462,52...328,51....285,51...233,51....165,51...116,50 x
105..........266,36...145,29....108,26....68,21.....25,13.....5,5
107.5........197,29....90,20.....61,16....32,11......7,4......1,1
110..........142,22....53,13.....32,10....13,5.......2,1......0,0
at 80 days, gamma is 3.0 for the 110, 3.3 for the 100, 2.8 for the 95
at 40 days, gamma is 2.8 for the 110, 4.8 for the 100, 3.7
at 20 days, gamma is 2.0 for the 110, 6.8 for the 100, 4.3
at 10 days, gamma is 0.8 for the 110, 9.6 for the 100, 4.2 for the 95
Gamma is the amount delta changes when the futures goes up/dn by 1.
For a buyer, the higher the number the better bec. it means you are on
the concave part of the opt vs. futures graph (which means you win more
and lose less as futures moves with/against).
at 80 days, vega*100 is 16 for the 110, 18.5 for the 100, 16 for the 95
at 40 days, vega*100 is 7 for the 110, 13 for the 100, 11
at 20 days, vega*100 is 2.7 for the 110, 9.3 for the 100, 6.3
at 10 days, vega*100 is 0.5 for the 110, 7 for the 100, 3.1
vega is the amount the option price goes up/dn if vol. goes up/dn by 1.
Since implied vol. is unpredictable the use of this is uncertain, unless
you have a view of where IV is going to go.
Conrad Bowers
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