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We know for any option strategy we can assume 3 senarios to know payoff.Is there any way to know what factos have maximum effect ?.

+1 vote
For example is Butteryfly strategy pays more when market become volatile or not .Is butterfly a long biased strategy.?
asked Nov 8, 2017 by Mehngapetrl (130 points)

1 Answer

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Hello Meghna
 Thanx for asking this question.Its true i always say
3 Scenario" test for any strategy  in the class ,as it  is easy to implement for a person who is very new to option. But if you want to design new strategy  u have to dig deep.
Delta indicates what is the chance that stock will expire in the money
for long call option : detla is positive. so if stock goes up long will gain(change in stock price x delta). gamma is positive  it means if stock moves  away from present value .ur gain will magnify. gamma is extra add on in gain calculated with detla alone . vega is positive - if volatility increases it is good for long . theta is -ve , the more time you hold this option theta will drag the price, its a bad thing for long.stay with long call and visualise and analyize this concept.Do not bring "put" and "short position" into the picture for a moment.
now delta for ATM call is 0.5 gamma Vega is positive and maximum while theta is -ve and |maximum| means ATM calls have maximum time value decay.
(for long call delta is positve and for short it is negative and delta is more for ATM then OTM. in fact every greek is max for ATM except delta which is 0.5 and for OTM it is  between 0 and 0.5 and for ITM its between 0.5 and 1.)

now with this knowledge we will analyse  one strategy called bear call option strategy
                             Sell 1 ATM call and Buy 1 OTM call
lets calculate the greek and analyise it. no actual values of greek needed.

Delta of strategy = Detla of OTM - delta of ATM= 0.3*- 0.5= negative .that's why its a bearish strategy .

Delta: The net Delta of Bear Call Spread would be negative, which indicates any upside movement would result in to loss. The ATM strike sold has higher Delta as compared to OTM strike bought.

Vega: Bear Call Spread has a negative Vega. Therefore, one should initiate this strategy when the volatility is high and is expected to fall.

Theta: The net Theta of Bear Call Spread will be positive. Time decay will benefit this strategy.

Gamma: This strategy will have a short Gamma position, so any upside movement in the underline asset will have a negative impact on the strategy.

As delta is small negative . so it has limited risk .As theta is positive   hence carrying overnight position is advisable.

answered Nov 8, 2017 by Concepts n Clarity (370 points)
edited Nov 8, 2017 by Concepts n Clarity