options

Question 1

what is delta?

Answer 1

change in the price of an option with respect to a change in the price of the underlying asset

Question 2

characteristics of delta

Answer 2

-moves closer to 1 as it moves ITM
-moves closer to 0 as it moves OTM
-delta of 1 resembles long future
delta of -1 resembles short future
-positive delta = long calls, short puts
-negative delta = short calls, long puts

Question 3

hedging delta

Answer 3

hedging delta = making delta zero

hedge delta by buying/selling options, futures, swaps

long call; sell futures
long put; buy futures

number of futures to buy = # of option contracts x delta

Question 4

what is the intrinsic value of an option

Answer 4

In The Money

Question 5

what is the extrinsic value of an option

Answer 5

Time Value

Question 6

purpose of the greeks

Answer 6

to value options

Question 7

greeks that focus on a change in the price of an option?

Answer 7

delta, gamma

Question 8

greek that focuses on change in implied volatility?

greek that focuses on change in time?

Answer 8

vega

theta

Question 9

what would you use to hedge gamma?

Answer 9

options

Question 10

what greeks are at peak when option is ATM

Answer 10

gamma, theta, vega

Question 11

five factors to pricing an option

Answer 11

1. price of underlying
2. strike price
3. implied volatility
4. time value
5. short-term interest rates