Stock moves X amount in $ , so are OTM Option will be worth ?????
I need to go back through the Basics of Options , cause I for the life of me can not remember the following ..... When does an OTM Option begin to make money ? Is it once the Stock Exceeds the Strike price of the OTM option OR will that OTM option begin making Money AS SOON AS the stock starts moving in the direction of your OTM Options ( Calls for Long in this Example ) ?
Say that XYZ stock is trading at $50 and we buy the $60 call for .50 cents . with 3 months till Expiration. If the Stock starts going up , and reaches say $53 in 1 weeks time ( so we still have plenty of time left till Expiration ) ..... How much would our $60 Call now be worth ( roughly ) ?
Do we look at the Delta when we first buy the $60 Call, to tell us what are Option will be worth " Per " $1 that XYZ stocks moves up $1 ( so long as there's enough time left to go till Expiration, so that Time Decay is not a factor ) ? Thanks man for your help . Don't know why I don't know the Answer to this
I'm tryig to make sure I understand how these Way OTM work ( Move up in Price ) in comparison to the amount the stock goes up and we also have plenty of time left till Expiration. I " Think " that when the stock moves up say $3 , that are $60 Call that had say a Delta of .10 when we first bought it , might now be a .30 Delta , and so we are Increasing the Value of our Option , Even WITHOUT the Stock reaching and Exceeding the $60 strike ?
Delta will tell you how much your option will gain or lose in value per 1.00 unit price change. Theoretically, price moving in your direction will always increase value of your option, it just may not be perceivable because if you have a delta of .005, then you're probably not going to have any net gains after theta decay, or more practically, your delta gain will be offset by the theta decay, in which case your unrealized P&L will still be zero or less than zero.
Gamma will tell you how much your rate of change in Delta will go up as price moves up.
So for a grossly overly simplified forecast, if when you bought the option, delta is .10, and the stock has gained three dollars, then you would expect your option to now be worth .30 more than when you bought it (less Theta x the number of days you have owned the option).
Thank you MacroNinja , that makes a lot of sense now.
I'll likely be looking to buy OTM options with 4 - 6 months of time till Expiration , as I am Hoping to get into these Options just before the Moment of a Big Breakout/Breakdown, so that I can realize the full effect of the Delta/Theta measurements remaining Accurate , and not have Time Decay coming into play , to effect what the " Greeks " are telling me