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D.W. Simpson 

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#1




Confused in option elasticity
I still can't understand the concept of elasticity about call and put option
The question is very easy why for a call elasticity is highest when the call is out of money, on the 6th edition P195 ASM it says "since then the value of the call is very small compared to the value of the underlying stock" but the numerator of the formular of elasticity is not only S (value of the stock) but also "delta" times "S" Thank you ^^ 
#2




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As the stock price decreases, the call option becomes riskier, and therefore increases. Looking at the equation above, as increases, the elasticity increases as well. 
#3




Not to play devil's advocate, but as the stock price decreases, by the same logic, wouldn't increase as well?

#4




In the BlackScholes framework, we assume that does not change as the stock price changes. That is, the expected return remains the same on the stock.
Last edited by Joe F; 02102010 at 03:40 PM.. 
#5




I am sorry I still confusing,please explain again thank you
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1 the more outofmoney the more risky? 2 the more risky so why you can entail that higher option return? 3 which is most I confused : the difference between delta and elasticity since the graph of delta is opposite to the graph of elasticity options, However what they discribe is similar: delta: delta is perincrease in stock how much increase in option price elasticity the each percentage increase in stock how much percentage increase in option price PS: on the DM textbook the reason author said is something about leverage So I am dizzy 
#6




If something is more risky, would you require more or less return on it gaofeng?

#7




Yes. The more outofthemoney a call option is, the riskier it is. Take a look at Figure 11.4 on page 350 of the textbook. Consider the node where the option price is $22.202. From there, the option value will either increase by 56% to $34.678 or decrease by 42% to $12.814. Sounds pretty risky, doesn't it? The investment either increases by 56% or decreases by 42%. But at the node below it, where the option price is $5.70, the option is an even riskier investment because from there it will then either increase by 125% to $12.814 or fall by 100% to zero. At this lower node, the investor will either make 125% or lose everything, so the risk is higher at this lower node. That's why the expected return on the option is higher at the more outofthemoney node.
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#8




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I got it, the answer is simple and easy "I would require more return" Thank you again for help^^ 
#9




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but it's too late now I have to go to bed^^, I will go over it carefully tomorrow morning. 
#10




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Thank you very much and I find that I need to read more on the text book than ASM 
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