I have noticed a discrepancy that I am unsure how to explain. I believe it may be telling me something, but I am unsure what exactly. Look at the following set of quotes: BBRY Nov 28 Quotes: 10.5 Call price: .17 Delta: .387 IV: 49% 10.0 Call price: .42 Delta: .67 IV: 49% Lets assume BBRY moves up 50 cents. That means the 10.5 call with a delta of .387 should see "at least" .19 appreciation (all other things equal). Therefore, I would anticipate the 10.5 call now having a value of .17 + .19 = .36 In the above quotes you can see the 10.0 call has a price of .42 and after a 50 cent up move the 10.5 should be the equivalent of the current 10.0 call. The price of .42 is > .36 as I would expect since the .387 delta will be increasing and therefore we should have gained more than the .19. The .42 price reflects this and all is right with the world. Now look at the Jan 15 '16 leap option: 12 Call price: 1.7 Delta: .5 IV: 53% 10 Call price: 2.4 Delta: .63 IV: 53% What I would expect is if BBRY made a $2 move upward, the 12 call with a delta of .5 should gain at "least" $1 (all else remaining equal). That means the 12 call would be trading at least 2.7 but slightly higher due to increase in delta on the way up. However, the 10 call (which is the equivalent of our 12 call after a $2 up move) is only trading at 2.4. This is less than the 2.7 projected. Why is this? What factor am I missing here? Are the options currently incorrectly priced? Is the .5 delta incorrect and the true delta is something lower? Thinking that because it was a leap option something was missing, I did the same study on QQQ and IWM. In both cases when adding the delta from an assumed 2 pt move, I ended up where I expected. The bid/ask was wider, but using mid points it gave correct values. Thoughts? What is this telling me and can it be exploited?
Delta of an option changes as the underlying changes. As BBRY would move through 10.50 it would gain more delta and finally after the $.5 move it would have delta 67, which accounts for the 6c you are missing.