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Found 6 results

  1. Michael C. Thomsett

    Options Delta And Other Greeks

    And of course, a lower delta reveals a less responsive likely reaction among option contracts, to movement in the underlying. Delta and other so-called “Greeks” are used by many traders to compare option values and volatility. The other three most often cited are Gamma, Theta and Vega. Delta is the most popular and most relevant because it compares option volatility and underlying volatility. This is a reliable test of implied volatility, at least in the moment. It will vary based on proximity between strike of the option and current price of the underlying; and also on time remaining until expiration. When strike and underlying price are close, you expect volatility to respond more, and of course when farther away, it responds less. The range of Delta is between a high of +1 and a low of -1. When you are holding long calls, Delta is positive when the underlying rises; if you hold short calls, Delta is a negative factor as the underlying rises. For long puts, Delta is a negative factor if the underlying is declining, and a positive factor if the underlying is rising. None of this should come as a surprise to anyone who has traded options. Delta is of value, however, when comparing two or more options whose underlying is similar. It allows you to articulate even a subtle difference in volatility. The Other Greeks Three other Greeks are worth mentioning. Gamma measures how sensitive Delta is to movement in the underlying. In a sense, Gamma is the Delta of Delta. It addresses the question of the stability in Delta and likely future volatility levels. When options are in the money, Gamma will be higher; and at-the-money or out-of-the-money Gamma will be lower. Theta is a measurement of time decay. How rapidly is time value declining. This varies with moneyness of the option and time to expiration, as you would expect. But given identical attributes of two or more options, Theta will not always track. It measures and compares time decay and enables you to determine which options decline quickly. Vega measures the option’s behavior relative to historical volatility in the underlying. Although Vega is not an actual Greek letter, it is always included in any discussion of the “Greeks” for options trading. The more time remaining until expiration, the greater the expected impact of volatility on the option’s price, notably when at or close to the money. When options are far from expiration and several points away from current underlying value, historical volatility’s role is likely to be little if any. Computing the Greeks is complex, but there is a solution. The Chicago Board Options Exchange (CBOE) offers a free calculator to discover the Greeks for any situation. Go to CBOE Option calculator to use this calculator. Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook. Related articles: The Options Greeks: Is It Greek To You? Options Trading Greeks: Theta For Time Decay Options Trading Greeks: Delta For Direction Options Trading Greeks: Gamma For Speed Options Trading Greeks: Vega For Volatility Why You Should Not Ignore Negative Gamma Why Delta Dollars Will Change Your Trading
  2. GavinMcMaster

    Why Dollar Delta Will Change Your Trading

    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. 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.
  3. The Delta is one of the most important Options Greeks. General The delta of an option is the sensitivity of an option price relative to changes in the price of the underlying asset. It tells option traders how fast the price of the option will change as the underlying stock/future moves. Option delta is usually displayed as a decimal value between -1 and +1. Some traders refer to the delta as a whole number between -100 and +100. Delta of +0.50 is the same as +50. The following graph illustrates the behaviour of both call and put option deltas as they shift from being out-of-the-money (OTM) to at-the-money (ATM) and finally in-the-money (ITM). Note that calls and puts have opposite deltas - call options are positive and put options are negative. Call and Put Options Whenever you are long a call option, your delta will always be a positive number between 0 and 1. When the underlying stock or futures contract increases in price, the value of your call option will also increase by the call options delta value. When the underlying market price decreases the value of your call option will also decrease by the amount of the delta. When the call option is deep in-the-money and has a delta of 1, then the call will move point for point in the same direction as movements in the underlying asset. Put options have negative deltas, which will range between -1 and 0. When the underlying market price increases the value of your put option will decreases by the amount of the delta value. When the price of the underlying asset decreases, the value of the put option will increase by the amount of the delta value. When the underlying price rallies, the price of the option will decrease by delta amount and the put delta will therefore increase (move from a negative to zero) as the option moves further out-of-the-money. When the put option is deep in-the-money and has a delta of -1, then the put will move point for point in the same direction as movements in the underlying asset. If you have a call and a put option, both for the same underlying, with the same strike price, and the same time to expiration, the sum of absolute values of their deltas is 1.00. For example, you can have an out of the money call with a delta of 0.36 and an in the money put with a delta of -0.64. Delta Sensitivity As a general rule, in-the-money options will move more than out-of-the-money options, and short-term options will react more than longer-term options to the same price change in the stock. As expiration nears, the delta for in-the-money calls will approach 1, reflecting a one-to-one reaction to price changes in the stock. Delta for out-of the-money calls will approach 0 and won’t react at all to price changes in the stock. That’s because if they are held until expiration, calls will either be exercised and “become stock” or they will expire worthless and become nothing at all. As expiration approaches, the delta for in-the-money puts will approach -1 and delta for out-of-the-money puts will approach 0. That’s because if puts are held until expiration, the owner will either exercise the options and sell stock or the put will expire worthless. As an option gets further in-the-money, the probability it will be in-the-money at expiration increases as well. So the option’s delta will increase. As an option gets further out-of-the-money, the probability it will be in-the-money at expiration decreases. So the option’s delta will decrease. 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. Delta as Probability Delta can be viewed 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 is a good indication 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. As mentioned, the sum of absolute values of delta of a call and a put with the same strike is one. This is in line with the probability idea. When you have a call and a put on the same underlying and with the same strike price, you can be sure that one of them will expire in the money and the other will expire out of the money (unless, of course, the underlying stock ends up exactly equal to the strike price and both options expire exactly at the money). Therefore, the sum of the probabilities should be 100% (and the sum of the absolute values of deltas should be one). Just for clarification, delta and probability of expiring in the money are not the same thing. Delta is usually a close enough approximation to the probability. Example If the delta on a particular call option is .55, then, all other things being equal, the price of the option will rise $0.55 for every $1 rise in the price of the underlying security. The opposite effect is also seen as for every $1 decline in the price of the underlying the option will lose $0.55. If the delta on a particular put option is -.45, then, all other things being equal, the price of the option will rise $0.45 for every $1 fall in the price of the underlying security. As with call options the obverse scenario is also true. List of delta positive strategies Long Call Short Put Call Debit Spread Put Credit Spread Covered Call Write List of delta negative strategies Long Put Short Call Put Debit Spread Call Credit Spread Covered Put Write List of delta neutral strategies Iron Condor Butterfly Short Straddle Short Strangle Long Straddle Long Strangle Long Calendar Spread Summary Positions with positive delta increase in value if the underlying goes up Positions with negative delta increase in value if the underlying goes down An option contract with a delta of 0.50 is theoretically equivalent to holding 50 shares of stock 100 shares of stock is theoretically equivalent to an option contract with a 1.00 delta Watch the video: Related articles: The Options Greeks: Is It Greek To You? Options Trading Greeks: Theta For Time Decay Options Trading Greeks: Vega For Volatility Options Trading Greeks: Gamma For Speed Want to learn how to put the Options Greeks to work for you? Start Your Free Trial
  4. The following video shows how the Theta impacts options pricing. It examines few live examples of different options strategies. Download video and slides: Options Greeks - The Theta.wmv Options Greeks Theta.pptx
  5. Mark Wolfinger

    Managing Risk For More Than One Position

    This trader is short two put spreads. One in YHOO (Jul 23/24) and the other in RUT (Jul 920/925). These positions began as iron condors and the calls were covered at a cheap price. "I’m not sure of what I should do. When adding these two positions together, the ‘portfolio’ is too delta long for my comfort zone." === RUT === I could offset the positive delta of the put-spread by shorting another call-spread. But that is somewhat inconsistent with my belief that I should initiate positions with at least two-months expiry. What would be more consistent is if I closed the put-spread and opened another Iron-Condor with a later expiry. The only thing is that in order to exit at break-even… This is somewhat expected as the volatility conditions for this trade were less than favorable. Another option would be to roll-down the put-spread. This would reduce the amount of positive-delta, but still leave the portfolio with positive delta. I guess I will be looking to exit the RUT put-spread today. [Note: Position was closed @ 1.20] My response: Be careful about measuring portfolio delta. One RUT deltas is much more significant than one YHOO. a) Delta is the change in value for an option when the underlying moves ONE POINT. One point for YHOO is a big move. One point for RUT is insignificant. b) The YHOO spread is only one point wide and the max price for the spread is $100 c) The RUT spread is 5 points wide and the max loss is $500 (less credit collected) d) Delta is a good guide for for current (imminent risk), and the risk graph shows how bad things can get when such and such happens. But as to your comfort zone, the RUT position is far more ‘dangerous’ because more cash is at risk and RUT will move many more points than YHOO on almost every trading day. e) Also consider that RUT is 40 points OTM. I am not suggesting that this is ‘safe’ but the question is: how do you feel about it? If this makes you nervous, yes, do exit. Especially today with a small market bump and a small IV decrease (RVX is -.77 as I write this). Adjustments Yes, selling another call spread is a viable adjustment. It is one way to maintain delta neutrality. However, when a trader looks at the current market, it is very difficult to sell call spread now that the DJIA has declined by more than 500 points in the past two days. The ‘best’ time to sell that call spread is immediately after covering your previous short spread. But selling another call spread is not for everyone. This is a difficult decision and I cannot offer guidance. For my trading, I do occasionally sell another spread after covering, but most of the time I do as you did: nothing. There is a world of difference between initiating positions and adjusting positions. When initiating a new trade, you have the ability to wait until conditions suit your needs. There is no urgency. You can easily satisfy that need for a minimum of two months. Adjusting requires a very different mindset. Your objective when adjusting is to reduce risk. NOW. It is not to make more money from the trade. It has nothing to do with future profits. It is only about one thing: recognizing that this trade has gone awry and you want to give yourself the best opportunity to stop the bleeding. Primary goal: make the position less risky, reducing the immediate cash at risk. Secondary goal: Create a position that you want to own (do not blindly adjust and hope for the best) and which gives you a good (this is where your judgement comes into play) chance to make money from THIS POINT. Do not worry about past losses. Do not trade to recover those losses. Trading to get back to even is a losing mindset. Traders make plenty of poor decisions trying to recover losses. Closing the put spread and opening another iron condor is a good idea. But ONLY when You do not allow the idea of ‘break even’ to be part of the decision. Please take my word for this. I know what it is like to roll the old position into a new one, choosing the new position based on its price (in other words, paying zero debit or collecting a cash credit for the roll), giving myself the chance to earn my original profit target – if only the new spread would expire worthless. When the market is trending this style of trading is financial suicide. Be willing to take the loss and independently find a suitable new position. You want to exit the current position because it is not one you want to own. The new iron condor is one that fits your trading criteria. Far too often traders make this ‘roll’ just to do something. Do not fall into that trap. You understand that doing this is two separate decisions. Close when you believe that is best. Open a new trade when you find a good one. Do not feel you must open that new trade at the same time the old one is closed. Yes – I know the need to get a new position so you can recover losses. Nothing wrong with wanting that new trade. Just make it a good one and do not allow the thought of getting back your money be part of the decision process. Yes, rolling down the put spread is viable, when two conditions are met. The cash debit required is not more than you are willing to pay The new position is one that you want to own. The important point of this post is that one YHOO delta is not the same as one RUT delta.
  6. tjlocke99

    Delta % ?

    Good afternoon. I see morningstar has option chains and some interesting data from a web interface. Does anyone know what they mean when they are showing delta as a %? Thank you! http://quote.morningstar.com/Option/Options.aspx?ticker=FSLR