Reference no: EM132953582
Options & volatility analysis
Options & volatility analysis Refer to supplement which contains data on call option prices and implied volatilities on the Nasdaq 100 index. The spot reference rate for all prices is 14940. Each individual option contract is written on 100 shares of stock, at a set strike price, for a given expiration date. These are European-style options which can only be exercised at expiry.
A delta (DM) of 0.50 implies that for a 1% rise in the spot rate,the price of the call option is expected to rise by 0.50%. A delta of -0.50 implies that for a 1% rise in the spot rate, the price of the put option is expected to fall by 0.50%. Implied volatility (IVM), very much like interest rate yield, is always quoted in annualized percentage terms. A reading of 15.00 (i.e. 15%) is equivalent to a 1 standard deviation move on the underlying spot rate over a 1-year period. For interpreting implied volatility or expected standard deviation for a nominal 1-month period, however, the implied volatility must be de-annualized as follows IVd=IV M×√112. Similarly, For interpreting implied volatility or expected standard deviation for a nominal 6-month period, however, the implied volatility must be de-annualized as follows IVd=IV M×√612, and so on.
Problem set supplement
- Call option prices below are written on NASDAQ 100 index as of Jul-22-2021 for two separate expiry dates, Aug-20-2021 and Jun-17-2022
- Spot was 14940 when the prices the prices were generated.
Please Refer the attachments below as reference to solve the questions:
Questions on basics and definitions:
1. Define delta. What is the approximate delta of an at-the-money ATM option? Which August expiry call option is the closest to being an ATM option? Which June expiry call option is the closest to being an ATM option? Note, this is a three-part question.
2. Which options offer more leverage, options with higher delta or lower delta? Explain.
3. What is the first-order hedge the market-maker will execute when selling 5 contracts of C14700 for August expiry? In other words, what trade does the market-maker do?
4. What is the first-order hedge the market-maker will execute when buying 10 contracts of C16000 for June expiry? In other words, what trade does the market-maker do?