option greeks - web.ma.utexas.edu · notes • Ψ is rarer and denotes the sensitivity to the...
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![Page 1: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/1.jpg)
Option Greeks
1 Introduction
![Page 2: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/2.jpg)
Option Greeks
1 Introduction
![Page 3: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/3.jpg)
Set-up
• Assignment: Read Section 12.3 from McDonald.
• We want to look at the option prices dynamically.
• Question: What happens with the option price if one of the inputs(parameters) changes?
• First, we give names to these effects of perturbations of parametersto the option price. Then, we can see what happens in the contextsof the pricing models we use.
![Page 4: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/4.jpg)
Set-up
• Assignment: Read Section 12.3 from McDonald.
• We want to look at the option prices dynamically.
• Question: What happens with the option price if one of the inputs(parameters) changes?
• First, we give names to these effects of perturbations of parametersto the option price. Then, we can see what happens in the contextsof the pricing models we use.
![Page 5: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/5.jpg)
Set-up
• Assignment: Read Section 12.3 from McDonald.
• We want to look at the option prices dynamically.
• Question: What happens with the option price if one of the inputs(parameters) changes?
• First, we give names to these effects of perturbations of parametersto the option price. Then, we can see what happens in the contextsof the pricing models we use.
![Page 6: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/6.jpg)
Set-up
• Assignment: Read Section 12.3 from McDonald.
• We want to look at the option prices dynamically.
• Question: What happens with the option price if one of the inputs(parameters) changes?
• First, we give names to these effects of perturbations of parametersto the option price. Then, we can see what happens in the contextsof the pricing models we use.
![Page 7: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/7.jpg)
Vocabulary
![Page 8: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/8.jpg)
Notes
• Ψ is rarer and denotes the sensitivity to the changes in the dividendyield δ
• vega is not a Greek letter - sometimes λ or κ are used instead
• The “prescribed” perturbations in the definitions above areproblematic . . .
• It is more sensible to look at the Greeks as derivatives of optionprices (in a given model)!
• As usual, we will talk about calls - the puts are analogous
![Page 9: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/9.jpg)
Notes
• Ψ is rarer and denotes the sensitivity to the changes in the dividendyield δ
• vega is not a Greek letter - sometimes λ or κ are used instead
• The “prescribed” perturbations in the definitions above areproblematic . . .
• It is more sensible to look at the Greeks as derivatives of optionprices (in a given model)!
• As usual, we will talk about calls - the puts are analogous
![Page 10: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/10.jpg)
Notes
• Ψ is rarer and denotes the sensitivity to the changes in the dividendyield δ
• vega is not a Greek letter - sometimes λ or κ are used instead
• The “prescribed” perturbations in the definitions above areproblematic . . .
• It is more sensible to look at the Greeks as derivatives of optionprices (in a given model)!
• As usual, we will talk about calls - the puts are analogous
![Page 11: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/11.jpg)
Notes
• Ψ is rarer and denotes the sensitivity to the changes in the dividendyield δ
• vega is not a Greek letter - sometimes λ or κ are used instead
• The “prescribed” perturbations in the definitions above areproblematic . . .
• It is more sensible to look at the Greeks as derivatives of optionprices (in a given model)!
• As usual, we will talk about calls - the puts are analogous
![Page 12: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/12.jpg)
Notes
• Ψ is rarer and denotes the sensitivity to the changes in the dividendyield δ
• vega is not a Greek letter - sometimes λ or κ are used instead
• The “prescribed” perturbations in the definitions above areproblematic . . .
• It is more sensible to look at the Greeks as derivatives of optionprices (in a given model)!
• As usual, we will talk about calls - the puts are analogous
![Page 13: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/13.jpg)
The Delta: The binomial model
• Recall the replicating portfolio for a call option on a stock S : ∆shares of stock & B invested in the riskless asset.
• So, the price of a call at any time t was
C = ∆S + Bert
with S denoting the price of the stock at time t
• Differentiating with respect to S , we get
∂
∂SC = ∆
• And, I did tell you that the notation was intentional ...
![Page 14: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/14.jpg)
The Delta: The binomial model
• Recall the replicating portfolio for a call option on a stock S : ∆shares of stock & B invested in the riskless asset.
• So, the price of a call at any time t was
C = ∆S + Bert
with S denoting the price of the stock at time t
• Differentiating with respect to S , we get
∂
∂SC = ∆
• And, I did tell you that the notation was intentional ...
![Page 15: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/15.jpg)
The Delta: The binomial model
• Recall the replicating portfolio for a call option on a stock S : ∆shares of stock & B invested in the riskless asset.
• So, the price of a call at any time t was
C = ∆S + Bert
with S denoting the price of the stock at time t
• Differentiating with respect to S , we get
∂
∂SC = ∆
• And, I did tell you that the notation was intentional ...
![Page 16: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/16.jpg)
The Delta: The binomial model
• Recall the replicating portfolio for a call option on a stock S : ∆shares of stock & B invested in the riskless asset.
• So, the price of a call at any time t was
C = ∆S + Bert
with S denoting the price of the stock at time t
• Differentiating with respect to S , we get
∂
∂SC = ∆
• And, I did tell you that the notation was intentional ...
![Page 17: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/17.jpg)
The Delta: The Black-Scholes formula
• The Black-Scholes call option price is
C (S ,K , r ,T , δ, σ) = Se−δTN(d1)− Ke−rTN(d2)
with
d1 =1
σ√
T[ln(
S
K) + (r − δ +
1
2σ2)T ], d2 = d1 − σ
√T
• Calculating the ∆ we get . . .
∂
∂SC (S , . . . ) = e−δTN(d1)
• This allows us to reinterpret the expression for the Black-Scholesprice in analogy with the replicating portfolio from the binomialmodel
![Page 18: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/18.jpg)
The Delta: The Black-Scholes formula
• The Black-Scholes call option price is
C (S ,K , r ,T , δ, σ) = Se−δTN(d1)− Ke−rTN(d2)
with
d1 =1
σ√
T[ln(
S
K) + (r − δ +
1
2σ2)T ], d2 = d1 − σ
√T
• Calculating the ∆ we get . . .
∂
∂SC (S , . . . ) = e−δTN(d1)
• This allows us to reinterpret the expression for the Black-Scholesprice in analogy with the replicating portfolio from the binomialmodel
![Page 19: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/19.jpg)
The Delta: The Black-Scholes formula
• The Black-Scholes call option price is
C (S ,K , r ,T , δ, σ) = Se−δTN(d1)− Ke−rTN(d2)
with
d1 =1
σ√
T[ln(
S
K) + (r − δ +
1
2σ2)T ], d2 = d1 − σ
√T
• Calculating the ∆ we get . . .
∂
∂SC (S , . . . ) = e−δTN(d1)
• This allows us to reinterpret the expression for the Black-Scholesprice in analogy with the replicating portfolio from the binomialmodel
![Page 20: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/20.jpg)
The Delta: The Black-Scholes formula
• The Black-Scholes call option price is
C (S ,K , r ,T , δ, σ) = Se−δTN(d1)− Ke−rTN(d2)
with
d1 =1
σ√
T[ln(
S
K) + (r − δ +
1
2σ2)T ], d2 = d1 − σ
√T
• Calculating the ∆ we get . . .
∂
∂SC (S , . . . ) = e−δTN(d1)
• This allows us to reinterpret the expression for the Black-Scholesprice in analogy with the replicating portfolio from the binomialmodel
![Page 21: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/21.jpg)
The Gamma
• Regardless of the model - due to put-call parity - Γ is the same forEuropean puts and calls (with the same parameters)
• In general, one gets Γ as
∂2
∂S2C (S , . . . ) = . . .
• In the Black-Scholes setting
∂2
∂S2C (S , . . . ) =
e−δT−0.5d21
Sσ√
2πT
• If Γ of a derivative is positive when evaluated at all prices S , we saythat this derivative is convex
![Page 22: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/22.jpg)
The Gamma
• Regardless of the model - due to put-call parity - Γ is the same forEuropean puts and calls (with the same parameters)
• In general, one gets Γ as
∂2
∂S2C (S , . . . ) = . . .
• In the Black-Scholes setting
∂2
∂S2C (S , . . . ) =
e−δT−0.5d21
Sσ√
2πT
• If Γ of a derivative is positive when evaluated at all prices S , we saythat this derivative is convex
![Page 23: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/23.jpg)
The Gamma
• Regardless of the model - due to put-call parity - Γ is the same forEuropean puts and calls (with the same parameters)
• In general, one gets Γ as
∂2
∂S2C (S , . . . ) = . . .
• In the Black-Scholes setting
∂2
∂S2C (S , . . . ) =
e−δT−0.5d21
Sσ√
2πT
• If Γ of a derivative is positive when evaluated at all prices S , we saythat this derivative is convex
![Page 24: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/24.jpg)
The Gamma
• Regardless of the model - due to put-call parity - Γ is the same forEuropean puts and calls (with the same parameters)
• In general, one gets Γ as
∂2
∂S2C (S , . . . ) = . . .
• In the Black-Scholes setting
∂2
∂S2C (S , . . . ) =
e−δT−0.5d21
Sσ√
2πT
• If Γ of a derivative is positive when evaluated at all prices S , we saythat this derivative is convex
![Page 25: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/25.jpg)
The Vega
• Heuristically, an increase in volatility of S yields an increase in theprice of a call or put option on S
• So, since vega is defined as
∂
∂σC (. . . , σ)
we conclude that vega≥ 0
• What is the expression for vega in the Black-Scholes setting?
![Page 26: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/26.jpg)
The Vega
• Heuristically, an increase in volatility of S yields an increase in theprice of a call or put option on S
• So, since vega is defined as
∂
∂σC (. . . , σ)
we conclude that vega≥ 0
• What is the expression for vega in the Black-Scholes setting?
![Page 27: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/27.jpg)
The Vega
• Heuristically, an increase in volatility of S yields an increase in theprice of a call or put option on S
• So, since vega is defined as
∂
∂σC (. . . , σ)
we conclude that vega≥ 0
• What is the expression for vega in the Black-Scholes setting?
![Page 28: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/28.jpg)
The Vega
• Heuristically, an increase in volatility of S yields an increase in theprice of a call or put option on S
• So, since vega is defined as
∂
∂σC (. . . , σ)
we conclude that vega≥ 0
• What is the expression for vega in the Black-Scholes setting?
![Page 29: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/29.jpg)
The Theta
• When talking about θ it is more convenient to write the parametersof the call option’s price as follows:
C (S ,K , r ,T − t, δ, σ)
where T − t denotes the time to expiration of the option.
• Then, θ can be written as
∂
∂tC (. . . , T − t, . . . )
• What is the expression for θ in the Black-Scholes setting?
• Caveat: It is possible for the price of an option to increase as timeto expiration decreases.
![Page 30: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/30.jpg)
The Theta
• When talking about θ it is more convenient to write the parametersof the call option’s price as follows:
C (S ,K , r ,T − t, δ, σ)
where T − t denotes the time to expiration of the option.
• Then, θ can be written as
∂
∂tC (. . . , T − t, . . . )
• What is the expression for θ in the Black-Scholes setting?
• Caveat: It is possible for the price of an option to increase as timeto expiration decreases.
![Page 31: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/31.jpg)
The Theta
• When talking about θ it is more convenient to write the parametersof the call option’s price as follows:
C (S ,K , r ,T − t, δ, σ)
where T − t denotes the time to expiration of the option.
• Then, θ can be written as
∂
∂tC (. . . , T − t, . . . )
• What is the expression for θ in the Black-Scholes setting?
• Caveat: It is possible for the price of an option to increase as timeto expiration decreases.
![Page 32: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/32.jpg)
The Theta
• When talking about θ it is more convenient to write the parametersof the call option’s price as follows:
C (S ,K , r ,T − t, δ, σ)
where T − t denotes the time to expiration of the option.
• Then, θ can be written as
∂
∂tC (. . . , T − t, . . . )
• What is the expression for θ in the Black-Scholes setting?
• Caveat: It is possible for the price of an option to increase as timeto expiration decreases.
![Page 33: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/33.jpg)
The Rho
• ρ is defined as
∂
∂rC (. . . , r , . . . )
• In the Black-Scholes setting,
ρ = KTe−rTN(d2)
• It is not accidental that ρ > 0 regardless of the values of theparameters: when a call is exercised, the strike price needs to bepaid and as the interest rate increases, the present value of the strikedecreases
• In analogy, for a put, ρ < 0.
![Page 34: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/34.jpg)
The Rho
• ρ is defined as
∂
∂rC (. . . , r , . . . )
• In the Black-Scholes setting,
ρ = KTe−rTN(d2)
• It is not accidental that ρ > 0 regardless of the values of theparameters: when a call is exercised, the strike price needs to bepaid and as the interest rate increases, the present value of the strikedecreases
• In analogy, for a put, ρ < 0.
![Page 35: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/35.jpg)
The Rho
• ρ is defined as
∂
∂rC (. . . , r , . . . )
• In the Black-Scholes setting,
ρ = KTe−rTN(d2)
• It is not accidental that ρ > 0 regardless of the values of theparameters: when a call is exercised, the strike price needs to bepaid and as the interest rate increases, the present value of the strikedecreases
• In analogy, for a put, ρ < 0.
![Page 36: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/36.jpg)
The Rho
• ρ is defined as
∂
∂rC (. . . , r , . . . )
• In the Black-Scholes setting,
ρ = KTe−rTN(d2)
• It is not accidental that ρ > 0 regardless of the values of theparameters: when a call is exercised, the strike price needs to bepaid and as the interest rate increases, the present value of the strikedecreases
• In analogy, for a put, ρ < 0.
![Page 37: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/37.jpg)
The Psi
• Ψ is defined as
∂
∂δC (. . . , δ, . . . )
• What is the expression for Ψ in the Black-Scholes setting?
• You should get that Ψ < 0 for a put - regardless of the parameters.The reasoning justifying this is analogous to the one for ρ: when acall is exercised, the holder obtains shares of stock - but is notentitled to the dividends paid prior to exercise and, thus, the presentvalue of the stock is lower for higher dividend yields
• In analogy, for a put, Ψ > 0.
![Page 38: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/38.jpg)
The Psi
• Ψ is defined as
∂
∂δC (. . . , δ, . . . )
• What is the expression for Ψ in the Black-Scholes setting?
• You should get that Ψ < 0 for a put - regardless of the parameters.The reasoning justifying this is analogous to the one for ρ: when acall is exercised, the holder obtains shares of stock - but is notentitled to the dividends paid prior to exercise and, thus, the presentvalue of the stock is lower for higher dividend yields
• In analogy, for a put, Ψ > 0.
![Page 39: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/39.jpg)
The Psi
• Ψ is defined as
∂
∂δC (. . . , δ, . . . )
• What is the expression for Ψ in the Black-Scholes setting?
• You should get that Ψ < 0 for a put - regardless of the parameters.The reasoning justifying this is analogous to the one for ρ: when acall is exercised, the holder obtains shares of stock - but is notentitled to the dividends paid prior to exercise and, thus, the presentvalue of the stock is lower for higher dividend yields
• In analogy, for a put, Ψ > 0.
![Page 40: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/40.jpg)
The Psi
• Ψ is defined as
∂
∂δC (. . . , δ, . . . )
• What is the expression for Ψ in the Black-Scholes setting?
• You should get that Ψ < 0 for a put - regardless of the parameters.The reasoning justifying this is analogous to the one for ρ: when acall is exercised, the holder obtains shares of stock - but is notentitled to the dividends paid prior to exercise and, thus, the presentvalue of the stock is lower for higher dividend yields
• In analogy, for a put, Ψ > 0.
![Page 41: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/41.jpg)
Option Elasticity (Black-Scholes)
• For a call, we have
S∆ = Se−δTN(d1) > Se−δTN(d1)− Ke−rTN(d2) = C (S , . . . )
• So, Ω ≥ 1
• Similarly, for a put Ω ≤ 0
![Page 42: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/42.jpg)
Option Elasticity (Black-Scholes)
• For a call, we have
S∆ = Se−δTN(d1) > Se−δTN(d1)− Ke−rTN(d2) = C (S , . . . )
• So, Ω ≥ 1
• Similarly, for a put Ω ≤ 0
![Page 43: Option Greeks - web.ma.utexas.edu · Notes • Ψ is rarer and denotes the sensitivity to the changes in the dividend yield δ • vega is not a Greek letter - sometimes λ or κ](https://reader033.vdocuments.us/reader033/viewer/2022041501/5e22270a6ef174419669ee96/html5/thumbnails/43.jpg)
Option Elasticity (Black-Scholes)
• For a call, we have
S∆ = Se−δTN(d1) > Se−δTN(d1)− Ke−rTN(d2) = C (S , . . . )
• So, Ω ≥ 1
• Similarly, for a put Ω ≤ 0