Your Inside Source for Options Information

October 29, 2018

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What is delta, and why is it important?

Delta is a theoretical estimate of how much an option’s premium may change given a $1 move in the underlying. For an option with a Delta of .50, an investor can expect about a $.50 move in that option’s premium given a $1 move, up or down, in the underlying. For purchased options owned by an investor, Delta is between 0 and 1.00 for calls and 0 and -1.00 for puts. For sold options, as the investor essentially has a negative quantity of contracts, we find that short puts have a positive Delta (technically a negative Delta multiplied by a negative number of contracts); short calls have negative Delta (technically a positive Delta times a negative number of contracts).

For example, the XYZ 20 call has a .50 Delta and is trading at $2 with XYZ stock at $20.50. XYZ rises to $21.50. The investor would expect that the 20 strike call would now be worth around $2.50 as seen below:

• $1 increase in underlying price x .50 Delta = $.50 anticipated change in option premium.
• Original Premium: $2.00 + $.50 estimated change = $2.50 estimated new premium after $1 stock price increase.

With a $1 move down in XYZ, the investor would expect to see this same 20 strike call option decrease in value to around $1.50. As the stock price rises and the call option goes deeper-in-the-money, Delta typically approaches 1.00 because of the increased likelihood the option will be in-the-money at expiration. As expiration approaches, in-the-money-option Deltas are also more likely to be moving slowly toward 1.00 because at expiration an option either has a Delta of either 0 or 1.00 with no time premium remaining.

Here is a look at a call Delta and how it might move:

• On a given day, an XYZ call has a Delta of .50 (50%)
• Current value $3.50
• XYZ stock goes up $1:
• Call will theoretically increase by 50% of stock move
• $1.00 x .50 = $.50
• Expected call value = $3.50 current + $.50 = $4.00
• XYZ stock goes up $.60:
• Call will theoretically increase by $.60 x .50 = $0.30
• Expected call value = $3.50 current + $.30 = $3.80

The following graph illustrates how Delta might be plotted against stock price:

 

Call Deltas range from 0.00 to 1.00 while put Delta ranges from 0.00 to -1.00. Remember long calls have positive Delta; conversely short calls have negative Delta. Long puts have negative Delta; short puts have positive Delta. The closer an option's Delta is to 1.00 or -1.00, the more the price of the option responds (in terms of dollars) to actual long or short stock when the underlying moves. Here is a quick chart for reference:

• Calls have positive Deltas (as generated by model)
• Positive correlation to underlying stock price change
• Stock price ↑ then call Delta tends to go up ↑
• Stock price ↓ then call Delta tends to go ↓
• Call Deltas range from 0 to +1.00
• Puts have negative Deltas (as generated by model)
• Negative correlation to underlying stock price change
• Stock price ↑ then put Delta tends to go ↓
• Stock price ↓ then put Delta tends to go ↑
• Put Deltas range from 0 to –1.00

Stock price, days remaining to expiration and implied volatility will impact Delta. With an increase in implied volatility, Delta gravitates toward .50 as more and more strikes are now considered possibilities for winding up in-the-money because of the perceived potential for movement in the underlying. For example, the 20 strike call in XYZ may have a .60 Delta with the stock at $21 and implied volatility at 30%. If implied volatility were to increase to 40%, the Delta may decrease to .55 as traders perceive an increased likelihood that the strike might be out-of-the-money at expiration.

Here is a look at how implied volatility changes can alter Delta:

 

Above we can see that higher implied volatilities lead to more strikes being ‘in play’ and more Deltas closer to .50. Low implied volatility stocks will tend to have higher Delta for the in-the-money options and lower Delta for out-of-the-money options.

Some traders view Delta as a percentage probability an option will wind up in-the-money at expiration. Therefore, an at-the-money option would have a .50 Delta or 50% chance of being in-the-money at expiration. Deep-in-the-money options will have a much larger Delta or much higher probability of expiring in-the-money.

Looking at the Delta of a far-out-of-the-money option might give an investor an idea of its likelihood of having value at expiration. An option with less than a .10 Delta (or less than 10% probability of being in-the-money) is not viewed as very likely to be in-the-money at any point and will need a strong move from the underlying to have value at expiration.

Time remaining until expiration will also have an effect on Delta. Looking at the same strike, an in-the-money call with longer time until expiration will always have a lower Delta than the same strike call with less time until expiration. It is just the opposite for out-of-the-money calls; the call with a longer amount of time until expiration will have the higher Delta than the option with less time.

 

As expiration nears, in-the-money call Deltas increase toward 1.00, at-the-money call Deltas remain around .50 and out-of-the-money call Deltas fall toward 0 provided other inputs remain constant.

It is important to remember that Delta is constantly changing during market hours and will typically not accurately predict the exact change in an option’s premium.

 

(Source: OIC)

 

Upcoming Economic Reports

A preview of what may move the market this week 

Options Insider Radio Network 

Episodes from the network explaining Delta

Options Bootcamp 65: Revisiting Delta, Butterfly Breakdown and Your Questions

Basic Training: Delta Revisited

• A basic overview of Delta
• What is it?
• How does it impact your trading?
• Inspired by a Market Trader Mentoring newsletter article Delta Can Still be Your Friend

Mail Call/Options Question of the week

With $TSLA threatening $315 how are you leaning in your Options trades this month? Would you rather:

• 18% - Buy 1-month $300 put
• 25% - Buy 1-month $330 call
• 25% - Sell 1-month $300 put
• 32% - Staying far away from it

Listener Questions and Comments:

• Question from Joshua Shealy: Thanks so much for all that you guys do! Sorry if this is a novice question. I know that Delta is not literally the % chance of expiring in the money, but more so the rate of change for a $1 movement in the underlying. I noticed today looking at VIX Calls that the strike closest to .5 Delta is the 20 strike, a long way from ATM. I usually associate near .50 Delta with being near ATM. Is this just a nuance of VIX, or am I missing something bigger?
• Question from Brian Fortin: Options Boot Camp Dan is fond of saying, why trade options naked when you can spread off the risk and make the same money by doing it twice? I feel the same way about carrying a short position into expiration? Why try to carry 6 short contracts into expiration to capture that last 5 cents, when you can just trade 7 contracts and do the right thing?
• Question from Gameday Dog: Aww man my vertical put spread has gone bad. I have +3 options at 61.5 and sold -3 at 62.5. Yesterday it gapped down to 50. I now have +200 shares of LULU in my account plus 3 put options at 61.5 and -1 put option at 62.5. I thought it was a $300 max risk spread. Do I have to do anything? Do I sell the shares? Everything expires in 7 days. Please help. Thanks. So, I learned about selling shares and back ratio spreads and even got a $19 credit.
• Question from Elio: Confused. How did that guy end up with only two of his short puts getting assigned to him? If he was short 3 shouldn’t all of them have been assigned?
• Question from JDog: I just got an options pitch that says that options buyers lose money seven out of 10 trades. Is that true?
• Question from Allen: Why would I trade options when 90% expire worthless?
• Question from AndersonIvesting: New to options. I use TD Ameritrade but currently I don't like it for options. I was looking at Charles Schwab. Any recommendations for an options newbie?
• Question from Sharkcake: I've been approved to trade options by my Brokerage but I have yet to execute my first trade. What trade do you recommend?

Options Bootcamp 30: Back to School, Back to Basics

Basic Training: It's that time of the year again. The kids are back to school, so let's go back to school as well, and refresh our listeners on the options basics.

• What is an option? How do options work? What is a multiplier?
• What are the Greeks: Delta, Gamma, Theta, and Vega?
• Long premium vs short premium.

Option Drills: A review of the basic positions:

Long call - Short call - Covered call - Long put - Basic vertical spread - Collars. Others can be found in previous episodes.

Mail Call: Question from Dave S. - In the Options Boot Camp podcast #28 and #20 you discussed buying deep in the money LEAPS and selling shorter term calls against them. If the calls you sold expire worthless everything is great. What happens if the underlying goes up and the calls you sold are in the money at expiration? Is it better to just buy back the calls or let them get exercised? Can you discuss the process if they are exercised? Do I need to sell the LEAP to cover the call that was exercised?

Options Bootcamp 8: It’s All Greek to Me

Options Bootcamp 8: its All Greek to Me Basic Training: Time to revisit the Greeks: Delta - The chief Greek Gamma - The rate of change of Delta, as the underlying stock changes, but sometimes overwhelming to beginners. Theta - Time decay. The...

Posted October 2nd, 2012

Options Bootcamp 8: It's All Greek to Me

Basic Training: Time to revisit the Greeks:

• Delta - The chief Greek
• Gamma - The rate of change of Delta, as the underlying stock changes, but sometimes overwhelming to beginners.
• Theta - Time decay. The rate of change of an option given a change in the time to expiration.
• Vega - The king of the Greeks. The rate of change of an option price, as a result of change in implied volatility.

What is the difference between a retail and professional options trader?

Mail Call: Reaching out for a bootcamp lifeline.

• Tweet from Tex05: Mark, why do you always say that retail options traders trade Delta and professionals trade Vega?
• Email question from Evan - Atlanta, GA: Can you guys explain the importance of dividends to an options trader? That seems particularly important given the recent snafu over SPY dividends. Why are dividends important to options traders and how should it affect my options trading?
• Facebook question from Mike Debrasse: I'm hearing a lot about this being a "low volatility environment." Apparently, that makes it difficult for options traders. Why is that? Why does options volume drop so dramatically when volatility goes down? Should I wait to trade options before volatility/Vega goes up? Thanks for your help.

Options Boot Camp 2: The Greeks

Basic Training:

• Risk variables (aka "the Greeks") are Delta, gamma, theta, and Vega.
• Delta: The measure of the sensitivity of the options' price given a change in the underlying instrument. It's also used to view the likelihood of whether an option will expire in-the-money.
• Gamma: The rate of change of an options' delta given the change in the underlying instrument.
• Theta: The rate of change of an options' value given a change in the number of days until an options' expiration.
• Vega: The rate of change in an options' value given the change in implied volatility.
• How professional traders use the Greeks and ways that novice traders can use them, too. It's a symbiotic relationship.

Roll Call

• John Foley joins Mark and Dan to discuss the how customers can use the Greeks to enhance their trading, where they can find the information in the Zecco platform, and how to avoid mistakes they have made in the past.

OICs Wide World of Options 33: Delta Spreads and OICs Position Simulator

Joe Burgoyne speaks with Randy Frederick from Schwab about Delta Spreads and discusses helpful investor resources including OIC's position simulator.

Advisors Option 57: Beware of Gamma and Flying Deltas

Options 101: Gamma: Measuring the Changes in Delta

• What is the relationship between gamma and Delta?
• What are the properties of gamma? What is put-call parity?
• At the money options and gamma? Out of the money options and gamma? Time and gamma?

The Buzz: The low volatility regime continues: 7 of the 11 days in the past 20 years where VIX has been below 10% have occurred since mid-May 2017. Two studies, two different conclusion about alts & hedge funds.

Office Hours: Listener questions and comments:

Advisors Option Flash Poll. With $VIX hitting new lows and $SPX new highs, what is your financial advisor telling you about using #Options?

• Write covered calls?
• Buy protective puts?
• Do Both - Use Collars
• They Won't Touch Options

Listener Questions:

• Question from LCB - Hey guys. You mentioned on the show that this is a challenging time to sell options due to low volatility. So does it stand that the opposite is true? Is it a good time to buy options? Particularly protective puts?
• Question from TIM D. - How high do rates need to be before I need to worry about rho?

Where to Find Options Insider Radio?

Do you know all the ways you can access Options Insider Radio

          

Options Insider Radio Network Live Recordings

Do you want to be a part of the fun?

This is when you can access the LIVE shows this week:

Monday:

Option Block LIVE at 12pm Central

Thursday:

Option Block LIVE at 12pm Central
This Week in Futures Options LIVE at 1:30 Central

Friday:

Volatility Views LIVE at 12pm Central

As always, you can join in the fun at http://mixlr.com/options-insider/