Better develop reflexes -- Across all maturities, all ITM/OTM options' delta would converge towards 50% when perceived and implied volatility intensifies. Option premium rises.

50 delta means ATM.

50 delta also means no-prediction about my option finishing ITM or OTM. When vol spikes, it becomes harder for "gamblers" to assess any given strike -- will it finish ITM or OTM?

Let's use a put for illustration. When underlier becomes very volatile,

- a previously deep OTM (hopeless) suddenly looks a useful insurance protection. eg - A ultra-low-strike put.

- a previously deep ITM (sure-win) suddenly looks "unsafe" -- may finish worthless.

Rule) At expiry, underlier volatility doesn't bother us and is treated as 0

Rule) At expiry, option delta == either 0 or 1/-1 never something else. Fully diverged

Rule) In general, 0 implied volatility means all options' deltas == either 0 or 100%

Rule) Similarly low implied volatility means all options' deltas are close to the 2 extremes.

## Sunday, November 7, 2010

### option rule - delta converges to 50/50 with increasing vol

Labels: finGreek, intuitFinance

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