Put going OTM and greeks?

I'm short AAPL Oct 150 Put. How will the greeks change when the put is moving closer to OTM or ATM? It's currently barely ITM. Will the theta increase dramatically when it moves into OTM territory? If so, I may hold the position longer. Thanks!

 

Generally, Theta peaks (for short term options) at ATM. So the put should have approx. same theta whether +1 ITM or -1 OTM. Obviously, if the put moves OTM it's a good thing.


There are exceptions but not the case with AAPL.

 

Note:


Delta is generally about .50 ATM. In other words, all else being equal, this is where the option value increases/decreases about 1/2 the value the underlying increases/decreases over a modest price range.


Time value, as a dollar amount, is generally greatest ATM.


Fwiw
Peace and gtty,

Lar

 

Also:

Delta can also be defined as the odds of this particular option expiring ITM. When Delta is .5 this is also a kind of way of saying the odds of this option expiring ITM are statistically equal to the odds of it expiring OOM.

This conclusion is based on the assumption that the market distributes normally (which we know it does not at least some of the time). I've found this to be a useful rule of thumb when the market IS distributing normally - keeping in mind that it may not continue that way.

fwiw.

Peace and gtty,

Lar

 

Gamma, Theta and Vega are bell-shaped, with the peak on ATM strike and are fairly symmetrical. Delta goes from 0 to -1 for puts.

 

MTE where that is true in theory its not in reality. Volatility skew in both the out of the money puts and calls will distort the shape of the curve significantly. I know I am getting a bit technical but its worth noting.

 

A529612,

You short put is short theta, therefore you do not want time value to increase (it will increase the premium). Time value decreases with time but can increase as a result of higher implied volatility. You are short implied volatility (you don’t want it to rise). Conversely, if implied drops, your time value will decrease at a greater rate than normal time decay. However, a fall in implied is usually accompanied by a fall in the underlying.

Time value is more a reflection of implied volatility rather than time to expiry. Time value on options on different underlying but with identical strikes, times to expiry, and underlying prices can vary because of different implied volatilities; the higher the implied, the higher the premium.

(Deep in-the-money calls sometimes trade at a discount/below intrinsic value (underlying – strike) effectively having no time value/zero implied volatility.)

Vega tells us how much an option will change for a 1% change in implied. For long puts (and calls) this is positive, meaning higher implied will increase the value of the premium; it is negative for short puts (and calls), ie lower implied will decrease the premium.

Generally, the greater a put is out-of-the-money, the higher the implied, the greater the vega in percentage terms but lower in point terms.

For calls, the further out-of-the-money, the lower the implied, the lower the vega in point terms but higher in percentage terms. See the attached Word.doc for an illustration (you may have to scroll up the page). The inconsistency in the lowest strikes for calls possibly reflects the tendency to a reducing extrinsic value (I may be out of my depth here. And it’s very late here in England).

The ranking is based on Last Trade implied so the strikes, deltas are not perfectly sequential, and skews may be distorted to a degree.

Good trading.

Grant.

 

Grant,

Not trying to nit pick but there are some flaws in what you posted.



“However, a fall in implied is usually accompanied by a fall in the underlying.”

You have that one backwards. A fall in the underlying usually results in a rise in the implied volatilities.


“Conversely, if implied drops, your time value will decrease at a greater rate than normal time decay”

There is no real “normal” time decay. If the implied volatility falls so will the rate of theta, assuming all other variables being the same including the number of days till expiration. If you change any variable whether it is IV or any of the others it will affect all of the Greeks.

“(Deep in-the-money calls sometimes trade at a discount/below intrinsic value (underlying – strike) effectively having no time value/zero implied volatility.) “

Which deep in the money listed calls trade below intrinsic value? They may trade at parity but not below intrinsic value.

 

Years ago, one of my favorite traders (Enan aka Ben) discribed an indicator he used. He called it a "Ping Wazoo".

Some markets like the S and P 500 index have a negative "Ping Wazoo". This means when the market drops, IV has a tendency to increase dramatically. The point is that this happens more readily in a decline than during rallies.

Other markets like KC coffee have a positive "Ping Wazoo". This means when the market spikes, IV has a tendency to increase more dramatically. The point is that this happens more readily in a rally than in a decline.

In other words, the nature of the market determines if IV has a directional component and to what extent.

fwiw.

Peace and gtty,

Lar

 

He was probably thinking of European style deep in the money puts.

Obviously, it's difficult to sell many DITM calls above parity - especially on high yield issues - but it's a relatively rare event when they actually trade below parity - usually exercised.