Chapter 05 · Section 5.1

Example - Price Drop

Consider the same 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 drop $2, the new premium should be:

c) 4.20
Yes. Since the stock price dropped by $2 the premium should also drop, but by $0.80. The delta factor is $0.50 for the first $1 change and $0.30 for the second $1 change. The change in the delta is due to the gamma factor. Continue
d) 4.60
e) 4.00

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