You guy know I'm your Primer's most devoted reader.
Thank you for showing the Bloomberg screens and for using FX instead of options, it adds much more value as most people explain the Greeks mainly through equity.
If I many:
Although negligible, kindly consider that Delta isn't strictly the probability of the option ending ITM but rather Delta takes into account the amount an option can be ITM.
"By using Delta, the options analyst will slightly overestimate the ITM probability of call options. However, this discrepancy is negligible, especially in the presence of other sources of errors inherent in the Black-Scholes model used to compute these probabilities."
"While a call can have an infinite payoff, a put’s maximum value is the strike (as spot cannot
go below zero). The delta hedge for the option has to take this into account, so a call delta must be greater than the probability of being ITM. Similarly, the absolute value (as put deltas are negative) of the put delta must be less than the probability of expiring ITM."
Negible, but a small mathematical difference that sometimes can lead to option miss pricing.
This was...EXCELLENT! Congrats.
You guy know I'm your Primer's most devoted reader.
Thank you for showing the Bloomberg screens and for using FX instead of options, it adds much more value as most people explain the Greeks mainly through equity.
If I many:
Although negligible, kindly consider that Delta isn't strictly the probability of the option ending ITM but rather Delta takes into account the amount an option can be ITM.
"By using Delta, the options analyst will slightly overestimate the ITM probability of call options. However, this discrepancy is negligible, especially in the presence of other sources of errors inherent in the Black-Scholes model used to compute these probabilities."
(https://medium.com/@rgaveiga/is-delta-the-same-as-in-the-money-probability-8df723bb4fe4)
"While a call can have an infinite payoff, a put’s maximum value is the strike (as spot cannot
go below zero). The delta hedge for the option has to take this into account, so a call delta must be greater than the probability of being ITM. Similarly, the absolute value (as put deltas are negative) of the put delta must be less than the probability of expiring ITM."
Negible, but a small mathematical difference that sometimes can lead to option miss pricing.
Quant Hedfe Funds are quick to identify these.
Hope to read more primers!
Cheers
S.
"Fx instead of stocks", apologies, I need to get better at proof reading ;)
Cool
Solid write up.