SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Why Delta Dollars Will Change Your Trading


Delta is one of the four main option greeks, and any serious trader needs to have a thorough understanding of this greek if they hope to have any chance of success in the trading options. If you’re a beginner, you can visit my blog to learn more about understanding option delta

Most serious traders probably have a pretty good grasp of delta.

However, there is one metric related to delta that I use religiously in my trading and that is Delta Dollars.

What is Delta Dollars?


Delta dollars is quite simply the position delta x the underlying price.

 

We know that delta gives us the share equivalency ratio, so if we own a long call with delta 0.40 it is equivalent to being long 40 shares of the underlying.

 

Let’s assume the stock is trading at $100. The delta dollars figure would be 40 x $100 = $4,000.

 

This tells us that the option position is equivalent to having $4,000 invested in the stock.

 

The delta dollars figure is going to depend a lot on the price of the stock. Let’s say that instead of the stock trading at $100, it was trading at $500. Our delta dollars figure in this example would be 40 x $500 = $20,000.

 

Perhaps now you can understand why it’s important to look at the delta dollars number and not just the delta.

 

Why is it important


Delta dollars tells us our overall directional exposure in the market.

 

If our account size is $50,000 and out delta is 100, that doesn’t really tell us much.

 

But if our delta dollars exposure is $200,000 then we know that it is too high for our account size.

 

Personally, I like to set a rule that I don’t let my delta dollar exposure get above 150% of my account size. More conservative traders might like to set that rule at 100%, whereas more aggressive traders might set it at 200%.

 

It’s personal preference, but the first step as a delta neutral trader is to start paying attention to delta dollars and then develop rules around this metric.

 

I also have rules regarding the delta dollar exposure for each trade and strategy.

 

Practical example

 

For an iron condor, I usually set a 200% rule for Delta Dollars.

 

Assume you have an iron condor on RUT that is risking $20,000. If the Delta Dollars figure gets above plus or minus $40,000 you might want to think about adjusting and getting back closer to neutral.

Capture2.PNG

 

Further learning

 

If you’re interested in learning more about delta and delta dollars I’ll be running a free webinar on Tuesday April 11th at 8pm New York time.

 

You can register here.

 

About the author: Gavin has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. You can read more from Gavin at Options Trading IQ.

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Can Assignment Cause Margin Call?

    I've had three emails in the past month on people being assigned on positions and receiving margin calls, and generally not knowing what happened. I advise everyone to completely research and become familiar with the exercise/assignment aspect of option trading. If you don't you can find your entire account blown out over a weekend.

    By cwelsh,

    • 6 comments
    • 5,095 views
  • Calculating ROI on Credit Spreads

    The trigger to this article was a discussion I had with someone on Reddit. There is a common misconception about calculating gains on trades that require margin, like credit spreads and short options (naked puts/calls, strangles or straddles). I believe it is important to explain how to do it properly.

    By Kim,

    • 0 comments
    • 433 views
  • Learning to Win by Learning to Lose

    It does not matter how good your trading system is - you will not win 100% of the time! A fact! The way you deal with this fact will go a long way toward determining how big a winner you become. In fact, after so many years spent in the financial arena, I have absolutely no doubts in my  mind that one of the most essential keys to winning is learning how to lose.

    By Kim,

    • 0 comments
    • 324 views
  • Should You Leg Into Iron Condor?

    The wings of an iron condor options trading strategy consist of two vertical credit spreads; i.e., a bull put spread and a bear call spread. The process of "Legging In" offers the promise of higher yields and enhanced probabilities of options trade success, but the question is whether it is worth the risk.

    By Kim,

    • 0 comments
    • 2,152 views
  • Should You Add to a Losing Trade?

    I'm sure most traders are familiar with this situation. You find a good setup, watch it for a while, then enter a trade, and it goes down right after you entered. Should you double down and add to your losing trade, or should you cut the loss and exit? That depends who you ask.

    By Kim,

    • 0 comments
    • 1,456 views
  • Top 5 Options Trading Myths

    There are a lot of myths and misconceptions about options trading. Many traders refrain from trading options because they consider it too risky. The only dangerous part of options trading is the risk-insensitive trader who buys and sells options with little or no understanding of just what can go wrong.

    By Kim,

    • 0 comments
    • 668 views
  • Selling Strangles Prior to Earnings

    Question from a reader: What is your opinion on a short strangle vs a short straddle? I understand the same unlimited risk will be there because you are trading naked options. I found that one strategy I have had some success with in paper trading is using short strangles around earnings to take advantage of large drops in volatility.

    By MarkWolfinger,

    • 1 comment
    • 522 views
  • 10 Fatal Mistakes Traders Make

    Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

    By Kim,

    • 0 comments
    • 1,580 views
  • Why Delta Dollars Will Change Your Trading

    Delta is one of the four main option greeks, and any serious trader needs to have a thorough understanding of this greek if they hope to have any chance of success in the trading options. If you’re a beginner, you can visit my blog to learn more about understanding option delta

    By Kim,

    • 1 comment
    • 1,347 views
  • How We Nailed The Implied Volatility Game

    Oracle (ORCL) has been following a similar pattern in the last few years. They announce their earnings date on the first week of the third month of the quarter and report during the third week of the month. Yet many times the options market "assumes" earnings during the fourth week and under-prices the third week options.

    By Kim,

    • 6 comments
    • 2,540 views



We want to hear from you!


in addition use beta Delta dollars (=delta dollars x beta to a benchmark like S&P) that's especially useful if you have positions with negative beta to S&P (like VXX or Bonds)

Share this comment


Link to comment
Share on other sites


Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   You have pasted content with formatting.   Remove formatting

  Only 75 emoticons maximum are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

Loading...