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I don't trade options, or know much about them, but I've always been curious about one thing. Say for example your option contract comes to expiry, but delta is at 0.7 or something. Thus if you have options on 1 contract of ES and we'll say ES goes from 2000 to 2010 (10 index point net gain) then the intrinsic value should be like $500, but because delta is 0.7 does that mean that it's only worth $350? Couldn't you just exercise the option at that point to realize the 500 gain??
Can you help answer these questions from other members on NexusFi?
The delta will increase as the market moves further in the option's favor. It won't stay 0.7. If at 2000 the delta is 0.7 and gamma is 0.1, at 2001 the delta will be 0.8.
And moments before expiration, a 2000 call option in a 2010 market would have a delta of 1, as it will gain and lose $1 in value for each $1 move in the underlying.
Trading: Equities, index options and futures/futures options
Posts: 190 since Apr 2010
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At expiration Delta is either zero or one. If the option expires with the strike exactly at the money or below with a call or above with a put then the Delta is zero. If the option expires one tick or more in the money then the Delta is one. That said, an option can be affected by something that happens between the close of the last day of trading and the actual expiration time. Some news that moves the market can cause out of the money options to be exercised or in the money options to be abandoned. Before expiration the Delta will constantly change as price, volatility and skew change so the current Delta is nothing more than a snapshot of the current situation. The Gamma of the option will tell you how much Delta will change with price but that too changes as the market moves. If you want to trade options on anything except the most basic level then you will need software that can generate expected Greeks and P&L of a position over time and price. The most common programs are Thinkorswim, Option Net Explorer and Optionvue along with Excel plug-ins such as Hoadley.
Well, I don't plan on day trading options any time soon. If I did it would be for hedging risk. However, if I did speculate with options it would be on a long term scale. For example, what's stopping someone from buying a put option after a reverse split on say VXX? 1 or 2 year options
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