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This may be a simple question to all, however, it is puzzling me for the simple reason that deep OTM calls have very small deltas per the BSM.

That is, even if the share price jumps (e.g. IBM moves +20% on an earnings upgrade) the value of the OTM call shouldn't move by much. What am I missing here?

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    $\begingroup$ Gamma of the option. $\endgroup$ – nimbus3000 Jul 3 at 14:50
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    $\begingroup$ I think Mr. Nimbus is saying that the (low) pre-announcement Delta of the option underestimates the profit you will make on a substantial price move in the stock. (The Delta method is more appropriate for a small moves). $\endgroup$ – Alex C Jul 3 at 15:22
  • $\begingroup$ Yes this is clear to me. I was missing the other greeks basically. Just as a follow up then, @nimbus3000 - vega, and vomma greeks would also be reasonable answers to the above question? $\endgroup$ – charm93 Jul 3 at 15:34
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    $\begingroup$ Not really, vega is much higher for ATM options than OTM ones, and implied volatility would (likely) drop immediately after an expected price impacting announcement. $\endgroup$ – Lliane Jul 4 at 1:18
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    $\begingroup$ Well an ATM call will be much more expensive, you can maybe buy 10 OTM calls for the price of an ATM call. For a given premium amount invested, OTM should offer the highest profits. $\endgroup$ – Lliane Jul 5 at 8:05

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