Chapter 05 · Section 5.1

Example - Premium

Consider the following American option:June 90 XYZ Call.

Current date         :    February 
             
Current price of XYZ :      $90                
Current premium      :      $ 5 
Gamma                :      0.2
Delta                :      0.5

If the price of XYZ were to move up $1, what should happen to the premium?

a) The premium will not change.
No. If the price of XYZ rises, the intrinsic value of the option increases. The premium should reflect this change in intrinsic value.
b) The premium will go up about $.20 because the gamma factor is 0.2.
c) The premium will go up about $.50 because the delta factor is 0.5.
d) The premium will go up about $.50 because the delta factor is 0.5.

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