chrismaths Wrote: ------------------------------------------------------- > My mate WaBu has a good discussion of this stuff > here: > http://www.berkshirehathaway.com/letters/2008ltr.p > df > on page 20 “Though historical volatility is a useful – but far from foolproof – concept in valuing short-term options, its utility diminishes rapidly as the duration of the option lengthens.” Hence our conclusion to this topic: Delta will be between 0 and 0.5
i already miss MattLikesAnalysis =(
lzhao, did you get all of that?
IheartMath Wrote: ------------------------------------------------------- > i already miss MattLikesAnalysis =( -1
oh, thats not nice!!!
.
First it’s KarenC with brianr, now you with MattLikesAnalysis. I set 'em up and they move in for the kill.
ah, young love…
-delta does not equal 0.5 for at the money option. delta depends on several assumptions: volatility, RFR, Dividend payments, news (takeover) etc… Is it American or European? I’ve seen perpetual embeded options before.
hehe. sorry, i went to pick up lunch and am currently eating. responses will be half-hearted. but my love won’t be. as for black-scholes being invalid for a 70 year option, sure, maybe, but it takes common sense to realize that if the SPY doubles this year to $200 and the option traded at $80 prior to the parabolic move, the option would likely almost double as well should it be american. but american aside, as we are now clear that i am right in that regard and that we’re onto european. i shall and return with my judgement.
im confused, you’re still thinking its close to 1? or are you agreeing its between 0 and .5?
ConvertArb Wrote: ------------------------------------------------------- > -delta does not equal 0.5 for at the money > option. > > delta depends on several assumptions: > > volatility, RFR, Dividend payments, news > (takeover) etc… > > Is it American or European? > > I’ve seen perpetual embeded options before. i think everyones been saying around .5, not actually .5 per se… and yes we’ve been through the numerous basic variables of black scholes
MattLikesAnalysis Wrote: ------------------------------------------------------- > as for black-scholes being invalid for a 70 year > option, sure, maybe, but it takes common sense to > realize that if the SPY doubles this year to $200 > and the option traded at $80 prior to the > parabolic move, the option would likely almost > double as well should it be american. That does not imply that delta = 1. That implies a large movement in gamma that pushes the delta up as the stock price increases. Again, delta is not a linear function for large price changes.
JohnThainsLimoDriver Wrote: ------------------------------------------------------- > MattLikesAnalysis Wrote: > -------------------------------------------------- > ----- > > as for black-scholes being invalid for a 70 > year > > option, sure, maybe, but it takes common sense > to > > realize that if the SPY doubles this year to > $200 > > and the option traded at $80 prior to the > > parabolic move, the option would likely almost > > double as well should it be american. > > That does not imply that delta = 1. That implies a > large movement in gamma that pushes the delta up > as the stock price increases. Again, delta is not > a linear function for large price changes. gamma for a 70 year call option is approx 0.
the poor guy is not asking for an exact number, he just wants a normal range assuming normal market conditions and standard variables everybody knows that large price movements are NOT consider normal market conditions when valuing an option unless if the stock is notorious for swinging big on a daily basis
american = 1 european = closer to 0.5 than 1 but I’m thinking at the rate of change between 0.5 and 1 will be much faster as a fraction of total T than your average option b/c EV of the 70-year is 20x that of 1 year and that extra gap between the current price and the strike price will skew the Rof-change higher. b/c of the market’s tendency to weed out risk-less profits, the option will start at a relatively high price. not as high as the american, but still high. b/c the overall expected return of the SPY over 70 years is ridiculous compared to your run of the mill options we deal with on a day-to-day, the delta of this option will be higher than your 1 or 2 year ATM option.
Posted by: ConvertArb (IP Logged) [hide posts from this user] Date: August 4, 2009 01:56PM > >gamma for a 70 year call option is approx 0. > um, only if its 100% in our out of the money (i.e when delta = 0 or 1)… otherwise it is somewhere between 0 and 1. the graph of gamma looks like an upside down parabola (like the CDF of the normal distribution)
ZeroBonus Wrote: ------------------------------------------------------- > the poor guy is not asking for an exact number, he > just wants a normal range assuming normal market > conditions and standard variables > > everybody knows that large price movements are NOT > consider normal market conditions when valuing an > option unless if the stock is notorious for > swinging big on a daily basis ok fine. 0.812343 is what is get
retracted as per IheartMath’s correction.
IheartMath Wrote: ------------------------------------------------------- > Posted by: ConvertArb (IP Logged) > Date: August 4, 2009 01:56PM > > > >gamma for a 70 year call option is approx 0. > > > > > um, only if its 100% in our out of the money (i.e > when delta = 0 or 1)… otherwise it > is somewhere between 0 and 1. the graph of gamma > looks like an upside down parabola (like the CDF > of the normal distribution) we all know what a gamma graph looks like. do you think theta is signifcant for this option?