I'm trying to calculate some things by hand (well, by computer) just so I have a thorough understanding of how they interact. I'd like to have a spreadsheet that tells me what an option price WOULD BE (not taking volatility into account which is a different can 'o worms) AFTER an expected move was made in the underlying stock. Here's where I'm at right now...
Current Delta is .5
Current Gamma is .02
Current Option price is 1.00
Expected Underlying Move is 2.5 over, say 15 days (# of days is irrelevant in this calculation though)
Underlying stock price is 30
Future Delta after a $1 underlying move would be .52 (current delta + gamma)
Future Option Price after a $1 underlying move would be 1.50 (current option price + current delta)
Future Delta after a $2 underlying move would be .54 (first future delta of .52 + gamma of .02)
Future Option Price after a $2 underlying move would be 2.02 (first future Option Price of 1.50 + first future delta of .52)
Current Delta after a $2.50 underlying move would be .55 (2nd future delta + (gamma/2) but the move is done anyway so I don't care)
Current Option Price after a $2.50 underlying move would be 2.56 (2nd future option price of $2.02 + 2nd future delta of .54)
So, fairly easy to calculate... what I can't figure out how to do is to get Excel to understand that the final option delta after the move is not in fact just (option delta + (gamma*EM)). I hope that makes sense. I need to calculate on some kind of series method where each $1 of the EM increases the price by the CURRENT delta, and the delta by the current gamma, and the next $1 of the EM raises the price by the NEW Delta, the delta again by the gamma, and so forth until the EM is completed.
OK, anyone still with me? LOL
Thanks anyone!
Jonathan
Current Delta is .5
Current Gamma is .02
Current Option price is 1.00
Expected Underlying Move is 2.5 over, say 15 days (# of days is irrelevant in this calculation though)
Underlying stock price is 30
Future Delta after a $1 underlying move would be .52 (current delta + gamma)
Future Option Price after a $1 underlying move would be 1.50 (current option price + current delta)
Future Delta after a $2 underlying move would be .54 (first future delta of .52 + gamma of .02)
Future Option Price after a $2 underlying move would be 2.02 (first future Option Price of 1.50 + first future delta of .52)
Current Delta after a $2.50 underlying move would be .55 (2nd future delta + (gamma/2) but the move is done anyway so I don't care)
Current Option Price after a $2.50 underlying move would be 2.56 (2nd future option price of $2.02 + 2nd future delta of .54)
So, fairly easy to calculate... what I can't figure out how to do is to get Excel to understand that the final option delta after the move is not in fact just (option delta + (gamma*EM)). I hope that makes sense. I need to calculate on some kind of series method where each $1 of the EM increases the price by the CURRENT delta, and the delta by the current gamma, and the next $1 of the EM raises the price by the NEW Delta, the delta again by the gamma, and so forth until the EM is completed.
OK, anyone still with me? LOL
Thanks anyone!
Jonathan