Delta from a Forward Starting Option

Splinter · September 9th, 2008, 12:41 pm

Hi all. Why the delta from a Forward starting option is almost zero?Thanks

daveangel · September 9th, 2008, 12:45 pm

it should be zero - the option premium is not fixed

Splinter · September 9th, 2008, 12:56 pm

This is not correct, the option has value and hence a premium should be charged, I think it is related to the intrinsic value. Let suppose that we have a ATM forward starting option, so doesnt matter the level from the underlying, its intrinsic value will be zeroAny other ideas?

daveangel · September 9th, 2008, 1:02 pm

i didnt say it didnt have value _ i said its not a fixed amount but is quoted as percent of notional.

Splinter · September 9th, 2008, 1:14 pm

Ok, the option has a small delta and this delta changes. For example why this delta changes if I change the dividend yield for example? thanks

daveangel · September 9th, 2008, 1:15 pm

your sensitivity is to cost of carry and volatility

Splinter · September 9th, 2008, 1:25 pm

Thanks daveangel, could you please describe what the cost of carry is and why it will impact the delta of a forward starting option?

daveangel · September 9th, 2008, 1:40 pm

cost of carry is what your position costs to carry. lets say you sold a 1year option that starts in 3mths time on a stock with a spot price of 100. lets also say rates are 5% and the dividend yield on the stock is 3%. the assumed 1 year forward price starting in 3m for the stock is 102 (youassume that you will pay 5% in interst and get 3% in dividends). however if rates went up then your forward goes up and if dividends go up your forward goes down.

Splinter · September 9th, 2008, 2:34 pm

Thanks!

daveangel · September 9th, 2008, 6:08 pm

glad to be of help ...