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 Yates

http://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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Options Trading-Mind Your Delta Part 1

I wanted to look a bit at Options trading-increasingly I am trading more and more options.They are extremely versatile and the more you use them and learn about them the more you will start to appreciate what they can do for your portfolio.

I like most options traders when they first started out made the classic mistake of focusing on price.I perceived that cheap meant they only cost 5 cents !!! and that an option costing $6 must be expensive. So like most people I watched as I bought a call or a put and .............YES fantastic the stock moved in the right direction AND my option-stayed the same or worse-went backwards.

I had made the classic mistake of buying "cheap" out of the money options.

Options can be one of three things :

1. Out of the Money (OTM)


2. At the Money (ATM)


3. In the Money (ITM)

For example Stock XYZ is trading at $25

If you want to buy an option then

• a $25 option is at the money(same price as the stock),


• a $20 option is in the Money(less than the price of the stock)


• a $30 option is out of the money(More than the price of the stock)

Options that are out of the money do not move in line with the movement of the underlying stock, options that are at the money will move at approximately half the pace of the stock(i.e. for every $1 movement of the stock up or down then the option will move approx 50 cents).

For options that are in the money then the more they are in the money the closer they will move dollar for dollar with the stock.

There are other factors that affect the price like time to expiry etc-but we will cover that in another post.

Therefore the reason I was not getting any movement in my option even when the stock move din the direction I wanted it to was because I was buying "cheap" out of the money options-ahhhhh I eventually realised...there is a reason they are "Cheap"

In fact they were not cheap at all and in some instances they were a lot more expensive than options at 10 or 20 times the price.

In the next part of this article I will look in a bit more depth at why this is the case and what you can do and what you should look at to give yourself more of a chance .

Best Wishes

Alan

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Tags: Options, Delta, Calls, Puts, Options Trading