My last stupid question, I promise. Say for example in intraday trading a $30 stock rises to $30.75. What would typically happen to the value of a near-expiration $27.5 call, and how long would it take? I am only concerned with heavily traded stocks. Thanks!
It would likely jump from approximately $2.55 to $3.15, in the same time as the stock moved from $30.00 to $30.75. But that's all approximate. It all depends just how near to expiration, and also depends if you are buying it or selling it. Before you try to start trading them, watch them in your trading pages and see how the prices move.
I would learn the basics before trading options Delta is a measure of the change in an optionâs price (premium of an option) resulting from a change in the underlying security (i.e., stock) or commodity (i.e., futures contract). The value of Delta ranges from â100.0 to 0 for puts and 0 to 100 for calls (here Delta has been multiplied by 100 to shift the decimal). Puts have a negative delta because they have what is called a "negative relationship" to the underlying: put premiums rise when the underlying rises, and vice versa. Call options, on the other hand, have a positive relationship to the price of the underlying: if the underlying rises, so does the premium on the call, provided there are no changes in other variables like implied volatility and time remaining until expiration. And if the price of the underlying falls, the premium on a call option, provided all other things remain constant, will decline. An at-the-money option has Delta a value of approximately 50 (.5 without the decimal shift), which means the premium will rise or fall by half a point with a 1 point move up or down in the underlying. For example, if an at-the-money wheat call option has a Delta of .5, and if wheat makes a 10-cent move higher (which is a large move), the premium on the option will increase approximately by 5 cents (.5 x 10 = 5), or $250 (each cent in premium is worth $50). As the option gets farther in the money, Delta approaches 100 on a call and â100 on a put, which means that at these extremes there is a one-for-one relationship between changes in the option price and changes in the price of the underlying. In effect, at Delta values of â100 and 100, the option behaves like the underlying in terms of price changes. This occurs with little or no time-value, as most of the value of the option is intrinsic. I will come back to the concept of time-value below when we discuss Theta. Three things to keep in mind with Delta: (1) Delta tends to increase as you get closer to expiration for near or at-the-money options; (2) Delta is not a constant, a concept related to Gamma, our next risk measurement, which is a measure of the rate of change of Delta given a move by the underlying; and (3) Delta is subject to change given changes in implied volatility.