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.
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.
The delta factor indicates the expected premium change subsequent to a $1 price move in the underlying asset.
The gamma factor describes the expected change in delta subsequent to a $1 price move in the underlying stock.