50-Delta Options

Discussion in 'SP6' started by Adam, Feb 22, 2020.

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  1. Adam

    Adam Active Member

    In section 20.4 of Hull (9th global), it defines that "at-the-money option is a call option with a delta of 0.5". Using BS formula, we know that delta of ATM option is not exactly 0.5. So here can we say the definition is only approximate?
     
  2. mugono

    mugono Ton up Member

    The delta of a call option is given by: N(d1) where d1 = [log(S/K) + (r - q + 0.5*sigma^2) * (T-t)] / (sigma*(T-t)^0.5).
    The notation follows the usual conventions [not reproduced here as I'm too lazy to write it down :)].

    It follows that the delta = 0.5 iff d1 = 0. The result is exactly true 1) AT expiration when the (T-t) term is zero; and 2) the stock is trading at-the-money; i.e. S=K.

    Otherwise, the said statement is only approximately true (where the stock trades ATM): it becomes an increasingly 'poor' approximation as time to expiration, implied volatility or interest rates increase.

    Play around with an online option pricing calculator if you want to 'eye ball' the dynamics.
     
    Last edited: Feb 25, 2020

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