Stock Option Trade Analyzed, Data Points Discussed
May 12, 2024 Issue # 24
We have previously discussed some option data points including delta, gamma, theta, implied volatility, in the money and time to expiration. Here is a refresher.
Delta measures the rate of change of the option's price relative to changes in the price of the underlying stock.
Gamma measures the rate of change of delta with respect to changes in the underlying asset's price.
Theta measures the rate of change in the option price due to the passage of time. Theta is also known as time decay.
Implied volatility reflects the expectation of future price fluctuation of the underlying stock.
A call option is in the money, if the price of the underlying stock is above the options strike. A put option is in the money, if the price of the underlying stock is below the option’s strike price.
Time to expiration is the amount of time in days when the option expires.
In the trade discussed below, we will discuss how these attributes were used to decide which option to buy and when to sell, and how the option moved in relation to the underlying stock. Percent return on option will be compared to percent return on stock, showing how a much greater percent return can be made with a much smaller investment.
The following example explains how a stock option increased in value by 57.5% in four trading days, while the underlying stock increased in value by 3.2%.