Assume that the trade in questions 23 and 24 was long 10 calls and short 10 puts. Can you calculate the collateral requirement for the trade? What was the total cost of owning the position? What will the options be worth? Both options lose all their value. Outside this range, one of the options will have some value. At expiration, what underlying stock prices are break-even points for the trade? Is any collateral required for this position? No collateral was required because both sides were long.
An unsubstantiated rumor surfaces that the stock in question might be acquired, and implied volatility soars to very high levels.
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Would put and call deltas also be restored? Answer: Yes, as long as there is time left in the contracts, it is possible for volatility to rise high enough to restore the original prices and deltas. Option prices on both sides of the trade would regain their original sensitivity to underlying price changes. However, because the delta-neutral point of the position would have shifted slightly over the 50 days that the trade was open, the new call price would be a few cents lower and the put price a few cents higher to achieve the same overall position value.
Actual values are listed in the following table. Answer: The second entry in the table suffers from much greater time decay. These numbers, although useful for quick comparisons, are average values across the entire timeframe. Theta is measured on the y-axis and the number of days remaining before expiration on the x-axis. Note that theta increases on a steeply accelerating curve as expiration approaches. The shape of this curve can be described using a third-degree polynomial. I would like to receive exclusive offers and hear about products from InformIT and its family of brands.
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The Option Trader's Workbook: A Problem-Solving Approach
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FREE U. Page 1 of 1. This chapter presents pricing basics with a practical focus on trading. This chapter is from the book. Overview Pearson Education, Inc. Collection and Use of Information To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including: Questions and Inquiries For inquiries and questions, we collect the inquiry or question, together with name, contact details email address, phone number and mailing address and any other additional information voluntarily submitted to us through a Contact Us form or an email.
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More filters. Sort order. This book is indeed literally a workbook of practice problems that cover real trading situations.