Options Delta – The Secret Delta Doubles $ The Fastest
Options Delta is the 1st Greek that you need to learn as a trader.
In a nutshell, delta determines how much you will profit or lose given a change in the underlying stock.
If a strike price of an option is at or close to the value of stock (ATM), the delta of that option is around +50 for call and -50 for put. It is actually +.5 or – 5 but since you can only buy in contract size of 100, it is the multiple of 100.
For example, if EBAY (EBAY) trading at $20, a 20 call option has +50 delta. While a 150 put option on Apple (AAPL) has -50 delta if AAPL trading at $149.95.
In the case of that call option, if EBAY moves higher, the 20 call option will gain in delta, thus you make a profit. The +50 options delta will move toward +100 which is the max level it can reach.
Options delta of 100 will make your options behave much like a stock.
In the other hand, the delta of this 20 call option will decrease (or you lose money) if EBAY drops and make the 20 strike further away from the current stock price. It then becomes an OTM option.
At the point of this writing, EBAY is trading at $21.48. A call 22 Jun option (25days to expire) has .44 delta. A contract of that will have +44 delta and cost you $.73 x100 = $73. If EBAY moves up $1, this contract will make you $44.
This only addresses the mechanics of options delta. What finally determines the value of your option contract is the combination of all 4 Greeks – Delta, Gamma, Vega and Theta.
If you trade using software, it will calculate everything for you. However, I will give you some quick exercise to manually do so in the near future.
The Secret:
To double your money the fastest, order ones with 25 to 30 options delta for call and -25 to -30 for put.
Want to find out why that is? Let’s go to the next article:
Options Gamma – Shifting Your Options Trading Gear Like a Pro
, How it helps pricing your options and discover Why gamma tells you options to buy to make money the fastest.
Revisit Options Delta concept as often as possible.
Category: OPTIONS GREEKS
