Did all an day session today and it might be just exhaustion but am confused about 1 question.
Bull Spread strategy.
X Option Premium Delta
88 4.4 .75
94 1.0 0.30
Stock price = 94. What is delta range. Answer is delta near 1.
I did Profit = Max (0, 91 - 88) - Max (0, 91 - 94) - Cost Where Cost = 4.4 - 1.0 = 3.4
So Profit = 3 - 3.4 = Negative 0.4 and therefor is Out of the Money. I chose Delta near 0 instead of delta near 1.
Instead of thinking in terms of Profit, should I be thinking in terms of VALUE = 3 to determine if it’s in the money, out of the money etv (NOT CONSIDER COST)? With value = 3, Then it’ s IN the MONEY,
Thanks,
Much appreciated.
Is this the question where it asked where the delta would be if the stock price was 91?
You don’t need to calculate the payoff at all for that question. Just look at it and understand how deltas work. If the price is 91 the 88 Call is in the money and it’s basically expiring so the delta is very close to or @ 1. The 94 call is out of the money and it’s almost expiring so the delta is almost 0. The delta of calls and puts, in absolute value terms , approach 1 when they are in the money and getting close to expiration.
Hey Jeff,
When I woke up this morning I got it right away. More of a factor of exhaustion yesterday in the evening than anything. Brain was toast.
Good thing the essay is in the morning. Would be too tired to run thru that in the afternoon.
THansk