Chapter 05 · Section 5.1
Example - The Delta Factor
Consider the same American option: June 90 XYZ Call.
Current date : February
Current price of XYZ : $91
Current premium : $5.50
Gamma : 0.2
Delta : ?
With XYZ trading at $90, the delta of this call is 0.5 and the premium $5.
If the price of XYZ were to move up $1 to $91 and the premium become $5.50, the delta factor will change to:
a) 0.2
b) 0.5
c) 0.7
d) 0.3
The delta factor changes with the price level of the underlying. It only stays constant over small changes in the price of the underlying.
The gamma factor describes the expected change in delta subsequent to a one unit price change in the underlying asset.