Delta. March 6, of 16

Size: px

Start display at page:

Download "Delta. March 6, of 16"

Beverly Short
5 years ago
Views:

1 Δ 1 of 16

2 As one of the four primary op9on Greeks, delta is perhaps the most important as it can tell us four essen9al pieces of informa9on. 2 of 16

3 The four important figures told by delta are: 1. The rate of change of an op9on rela9ve to movement in the underlying 2. Share equivalency 3. Hedge ra9o 4. Probability of a stock expiring $0.01 beyond the strike of the op9on 3 of 16

4 1. The rate of change of an op;on rela;ve to movement in the underlying Delta represents how much an op9on will gain or lose with the first $1.00 move in the underlying. 4 of 16

5 For calls, delta is posi9ve, meaning the op9on price will move in the same direc9on as the underlying. For puts, delta is nega9ve, meaning the op9on price will move in the opposite direc9on as the underlying. 5 of 16

6 This makes sense intui9vely, as price apprecia9on will increase the value of calls, while price deprecia9on will increase the value of puts (all else held equal). 6 of 16

7 2. Share equivalency Delta can also tell us how many equivalent shares we are long or short. If the delta of an op9on is +0.82, the op9on represents 82 shares of long stock. If the sign was nega9ve, the op9on would represent 82 shares of short stock. 7 of 16

8 For Futures, Delta represents the equivalent exposure to a no9onal por9on of a futures contract, as each op9on expires to only one contract. 8 of 16

9 For example: If /ES is trading for 2093 The delta put is the 1965 strike The delta of one futures contract would be +/- 1 If we are short the 1965 put we have 0.16 delta - or- 16% exposure to the futures contract If /ES trades for $50 a point then 2093 x $50 = $104,650 No9onal Short 1965 Put: 0.16 x $104,650 = $16,744 of long exposure 9 of 16

10 3.Hedge Ra;o The third thing delta tells us is a hedge ra9o between the op9on and the underlying. We can calculate a hedge ra9o by dividing the quan9ty of stock by the op9on delta: If posi9ve deltas needed: (# of Shares / Op9on delta) If nega9ve deltas needed: - (# of Shares / Op9on delta) 10 of 16

11 Hedge ra;o example: We are long 150 shares of XYZ stock (+150 deltas). We can perfectly hedge our posi9on by adding nega9ve deltas through: Buying puts Selling calls 11 of 16

12 Hedge ra;o example: Calls: - (+150 / +50) = - 3, Sell 3 contracts Puts: - (+150 / - 50) = +3, Buy 3 contracts In each case, we use three 50 delta op9ons to hedge our posi9on of being long 150 shares. 12 of 16

13 4.Probability of that op;on expiring in- the- money (ITM). Delta also tells us is the probability of that specific op9on expiring ITM. For example, an op9on with a delta of.25 has an approximate 25% chance of expiring ITM. 13 of 16

14 This becomes useful when trying to quickly determine 1 standard devia9on (SD) and 2SD strikes. The delta value on these strikes are as follows: 1SD: 16 delta on each side 2SD: 2.5 delta on each side 14 of 16

15 15 of 16

16 As we can see, delta is much more than just how much an op9on will change in value rela9ve to changes in the underlying. Understanding the different ways delta can be used is an important step in becoming a beker, more informed trader. 16 of 16

17 DISCLAIMER: The purpose of this material is to demonstrate market trading techniques and strategies designed to give you the skills and confidence to manage your own investments. The risk of loss in trading securi9es, op9ons, futures and forex can be substan9al. You must consider all relevant risk factors, including your own personal financial situa9on, before trading. Op9ons involve risk and are not suitable for all investors. You are assuming the en9re risk of any and all trades placed in the stock market. Due to the 9me- cri9cal nature of trading, the varying fees charged by brokerages, and the ac9vity of other market par9cipants, we cannot guarantee that similar trades you place will mirror the exact performance of our porlolio. dough, Inc. is the copyright and trademark holder of all tastytrade branded proper9es. dough is not a licensed financial advisor, registered investment advisor, registered broker- dealer or FINRA SIPC NFA- member firm. dough does not provide investment or financial advice or make investment recommenda9ons. dough is not in the business of transac9ng trades, nor does dough agree to direct your commodity accounts or give trading advice tailored to your par9cular situa9on. Nothing contained in our porlolio demonstra9on cons9tutes a solicita9on, recommenda9on, promo9on, or endorsement of any par9cular security, other investment product, transac9on or investment. BY USING THE TASTYTRADE WEB SITE AND ACCESSING THE TASTYTRADE MATERIALS, YOU AGREE, AT ALL TIMES, TO INDEMNIFY, DEFEND, AND HOLD DOUGH (INCLUDING ANY OF ITS AFFILIATES, OR ITS RESPECTIVE SUCCESSORS AND ASSIGNS, OR ANY OF ITS RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES, LICENSORS, OPERATIONAL SERVICE PROVIDERS, ADVERTISERS, OR SUPPLIERS) HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, ACTIONS, DEMANDS, SUITS, LOSSES AND COSTS (INCLUDING ATTORNEYS FEES) RESULTING FROM TRADES YOU PLACE IN THE MARKET. DOUGH SHALL NOT BE LIABLE FOR ANY LOSS OR DAMAGE, OF ANY KIND, DIRECT OR INDIRECT, IN CONNECTION WITH OR ARISING FROM USE OF EDUCATIONAL SERVICES PROVIDED AS PART OF THIS PORTFOLIO DEMONSTRATION dough, Inc. All rights reserved. Terms of use apply. Reproduc9on, adap9on, distribu9on, public display, or exhibi9on for profit in whole or in part without dough s express wriken permission is prohibited under penalty of law.

Calcula:ng Stock Expected Moves

Calcula:ng Stock Expected Moves Today, we will talk about calcula:ng expected moves in stock prices based on op:on data. This formula is not only the center of many of our Market Measure segments, but