Ok makes sense. I guess when Natenberg says "sell the underlying" to reduce delta by 100, he means going short. Thanks. I have another question or two, but am going to try to answer them on my own. If I can't, I will be back You guys are a great resource.
Ok, now for my 3rd question. I am bit confused about gains/losses before expiration. Suppose the following (call) - Underlying: 100 Strike: 105 Expiration: June Premium: 5 Let's say I buy the call on May 10. Now suppose on May 20 the underlying rises to $120. Suppose also that the theoretical value rises to 10 because of the underlying's rise on May 10. Is my gain $5 because of increase in theoretical value (i.e., $10 theoretical value - $5 initial premium)? Or is it $10 because of value of excerising the option (i.e., $120 underlying - 105 strike - $5 premium)?
Your example is a bad one, since the call would be worth at least 15 (as it has $15 of intrinsic value) + whatever time value it has, and not 10 as you suggest. In your example, it is obviously better to exercise the call, but in reality this will not be the case, as it is usually better to sell the option to capture the remaining time value.
I see. Makes sense. So, my daily "gains/losses" are the increase/decrease in price of the call, right? From $5 to $15, whatever. Because that will be basically the same, if not more (time value), as the early excercise of the option, right?
Yes, that's right. An American-style call will generally not be exercised early since it is not optimal to do so because of the remaining time value, which is lost on exercise. However, it may be exercised early if it is ITM and the stock goes ex-dividend.
Just catching up. Finally! I've spent a couple of minutes of my life reading your posts. All I can say is, uh, thank you.