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:
a) 4.50
b) 6.00
c) 4.20
d) 4.60
e) 4.00
The delta factor represents 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.