All options before expiry have a curved price profile. At any point in time, the slope of the curve, the delta, gives the equivalent futures exposure.
At any point in time the curvature, gamma, is the measure of how rapidly this futures exposure is changing. As time passes, options decay in value and approach the expiring kinked price profile. One way of representing the variation of deltas and gammas is a delta contour study.
The Delta Contours study shows the underlying price versus time for various delta values; the default range is from 0.0 – 1.0 and increasing in .1 increments. You are able to show 0-11 curves with arbitrary delta values.
This study helps illustrate when to re-hedge a portfolio. For example, if re-hedging occurs whenever the delta increases or decreases by .1, then re-hedging will occur at the price levels represented by each contour.
Example: Looking at the Dec 08 E-mini S&P 500 (symbol EPZ8) daily chart, the display indicates that in the middle of September the deltas move from .5 up to .7 then down to almost .4.
This study also clearly illustrates the effect of time on a portfolio. For example, the Delta Contours study shows that several weeks before expiration the deltas for the out-of- the- money strikes decrease while the deltas for the in the money strikes increase.
Delta Contours Parameters
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Parameter |
Description |
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Display |
Opens sub-window to set parameters: •Delta: Delta value. •Display = If selected, component is displayed. •Color = Line color. •Weight = Line thickness. for components, including Smooth, which allows you to switch between the actual and a smoothed representation of the curves. |
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Params |
Opens sub-window to set: •Model •Option Contract = underlying instrument, expiration, and option type •Strike price •Volatility(%) = Historical, Implied, or enter your own •Interest rate (%): Default value, or enter your own •Opened: Date position was opened. •Quantity |