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@IGOLO from the lecture its clear that you would sell a call option say today while the share price is high, implying even the call option would be high, then when the share price fall in that future, its also assumed the call option which you sold while prices were high’s price would fall, then you buy it back. making a profit. However the trick is in how many of the call options do you need to compensate you for the loss in (falling share prices), hence the simplified Delta Hedge!
It then in example 6 meant martin had to sell 4080 call option which would protect him against the future expectations that prices will fall!
In hind sight if the prices do indeed go up instead of fall , Martin’s share market value increases, and the call option which he sold at the time 0 when he thought prices will go down becomes expensive to buy back. its a give or take situation. Like insurance for your car. You insure thinking if you get an accident someone replaces your car, however if nothing happens to your car all your life the insurance co gains, but if you indeed smash it its replaced!.
This is interesting indeed.
if there are prospects that the future share price of an investment wld fall, is it advisable to get a pull or call otion…pls xplain
If you own shares and you are worried that the price of the share might fall, then the most sensible thing to do would be to buy a put option (there is no such thing as a pull option ). The put option will give you the right to sell the share at a fixed price. So…..if the share price does fall below that price, then you are protected because you still have the right to sell it at the fixed price.
Thank you , I’m going back to the lecture.
I love your lectures, really very well explained, so thank you very much.
I have a question in relation to Delta Hedge, it assumes that only current MV of share changes, but N(d1) is constant. How could it be when we use Current MV of shares in calculations of N(d1), so it should change as well.
@cara, That is very true, which is why delta hedges need to keep being changed (and this is stated in the lecture).
That is the reason for all the other Greeks, but you are only expected to know what they measure and you are not expected to be able to calculations with them.
Sir..kindly let me know how he is going to gani by selling call option???if share price is falling…value of call option also falling…..he would have purchased call option at higher price….and by selling it at lower price it wont be loss???
@syedwaqar, You sell it first (at the higher price) and buy back later (at the lower price)
Thank you .There is no way i would have learnt the delta hedge if i had not watched the video here
Question 3 in the Dec 2010 P4 examination paper is a good question on options.
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