Options Trading-Mind Your Delta Part2
Following on from my last post let's look at how to use Delta to ensure we get the best possible opportunity for options to move nearly dollar for dollar with the underlying asset.
In order to do this it will be necessary to look at the Delta of the option this will tell us how the option will move in relation to the stock or asset, the higher the Delta the more it will move in relation to the underlying stock. A Delta of 100 means that the option will move more or less identically to the underlying asset.
What we want to do then is to find options with a Delta of at least 85 this will ensure that we get good movement of the option in relation to the asset. If you trade options frequently then it may be worthwhile investigating some of the options software available on the market today. Alternatively lot of modern brokers platforms will provide the relevant information for options, assuming they allow you to trade them.
An excellent site is http://www.ivolatility.com/ this site will allow you to find out the Delta of the option that you are considering using, it will also provide you with a number of other statistics such as implied volatility and the rest of the Greeks such as Theta.
Another advantage of trading options rather than the stock is they allow you to utilise a lot less in terms of your accountfunds than buying say one hundred shares of the stock, this means that you can either buy more positions thus increasing the diversification of your account or utilise the funds that would otherwise have been used to buy the stock in another fashion such as an interest bearing account or T Bill.
It is therefore a very important that we start to think of options not as cheap or expensive(in terms of dollars to buy) but whether are not we have the necessary Delta to ensure the upside or downside that you are looking for based on the movement of the stock or other asset.
Certainly looking for options with a Delta of 85 or greater will cost a bit morer than it would do to buy out of the money options but your chances of success are greatly increased, no longer will you watch the stock move in the direction you want it to but find that your option stays the same or goes backwards.There are other factors at play that will determine the value of your option such as volatility levels but if you have historically been purchasing out of the money options then this one change to your approach will radically improve the success that you have.
If you want to learn more about options I can highly recommend any or all of the following Books :
High performance Options Trading by Len Yateshttp://www.amazon.co.uk/exec/obidos/ASIN/0471323659/flatwave-20
Trade Options Online by George A Fontanills
http://www.amazon.co.uk/exec/obidos/ASIN/0471359386/flatwave-20
How I trade Options by Jon Najarian
http://www.amazon.co.uk/exec/obidos/ASIN/0471312789/flatwave-20
Best wishes
Alan
Tags: Options Trading, Delta, Stocks, Theta, Volatility
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