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 Dollar Delta 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 Dollar Delta.

What is Dollar Delta?


Dollar Delta 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


Dollar Delta 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 Dollar Delta.

 

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

  • 4 Directional Options Trading Strategies

    Some Option traders prefer to trade mostly non directional strategies, while other option traders prefer to trade directional strategies.  Well, in the world of Options trading, there is no right or wrong answer. You can create a host of strategies based on your preferences and outlook.

    By Kim,

    • 0 comments
    • 84 views
  • Digging Deeper into the Inflation Threat

    Stoking the Embers of Inflation is one of the more important articles we have written. The Monetary Equation Identity discussed in the article provides a counterintuitive way to think about inflation. It took us a long time to accept that this identity lays out a real case for stagflation.

    By Michael Lebowitz,

    • 3 comments
    • 425 views
  • Does Option Selling Have Positive Expected Returns?

    Academic research refers to the persistent phenomenon of ex-post implied volatility (IV) exceeding realized volatility (HV) as the Volatility Risk Premium (VRP). As it applies to option premiums, this leads to a positive expected return for being a systematic option seller.

    By Jesse,

    • 0 comments
    • 202 views
  • Newton Technical Perspective 6/18/2018

    As we enter the third week of June, sentiment has steadily gotten more optimistic, with sentiment polls like Investors Intelligence having risen now for the 5th straight week, while Bears have dropped down under 18%.  The net plurality now stands at 35%, which is worrisome given that Equity put/call data has also dipped down to levels last seen in late January when equities peaked.

    By Mark Newton,

    • 0 comments
    • 631 views
  • Top 10 Things To Know About VIX Options

    VIX options use the CBOE Volatility Index (VIX) as its underlying asset. VIX options were the first exchange-traded options that allowed investors to trade the market volatility. VIX options can be used as a hedge against sudden market decline, but also as speculation on future moves in volatility.

    By Kim,

    • 4 comments
    • 206 views
  • How Hedge Funds Use Options

    Hedge funds and institutions have been using options to get market leverage for years. Warren Buffett has been known to buy calls and sell puts to get bullish exposure, and so has Carl Icahn. And recently I told my subscribers about a massive options trades that shows just how these big investors use options.

    By Jacob Mintz,

    • 2 comments
    • 303 views
  • Synthetic Short Stock – Higher Risk

    The synthetic long stock is a low-risk, highly leverage strategy. But for synthetic short stock, the risk profile is completely different. For the synthetic long, the combination consists of a long call and a short put, at the same strike, and at the same expiration.

    By Michael C. Thomsett,

    • 0 comments
    • 179 views
  • Trade Decisions: Risk or Profits?

    When trading, I believe very strongly that the best method for accumulating profits over the years is to ignore whether a specific position is currently profitable or is losing money.  When looking at any position, it's always necessary to make a buy/hold/sell decision.  Of course, for most option traders 'hold' wins most of the time. 

    By Mark Wolfinger,

    • 0 comments
    • 166 views
  • How To Protect Your Blind Side

    “The price of protecting quarterbacks was driven by the same forces that drove the price of other kinds of insurance: it rose with the value of the asset insured, with the risk posed to that asset.”  -Michael Lewis, The Blind Side. Counter-intuitively, that is often not the case in the capital markets.

    By Michael Lebowitz,

    • 0 comments
    • 823 views
  • How To Evaluate Options Trading Service

    I'm getting a lot of emails asking me to recommend an options advisory service. If you currently subscribe to an option trading service, or if you’re considering doing so, here are some tips how to select one. Those tips will help you to avoid some costly mistakes. 

    By Kim,

    • 0 comments
    • 242 views

  Report Article

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...

×   Pasted as rich text.   Paste as plain text instead

  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

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs