A Word About An Option's Delta ……

                  If you have ever looked at an options table, you may have noticed several Greek words associated with the options premium and strike price.  Delta is one of those words … a simple definition of delta is the “percentage move an option premium makes in relation to its’ stock price”.  In other words, if an option’s delta is .75 then for every $1 move an underlying asset makes the option premium moves $.75.      

                   Call deltas can range from 0 to 1 and Put deltas can range from 0 to -1 ( -1  equals a dollar for dollar downward move in the stock).  One might think that the best option to purchase would always be the one with the highest delta. 

                     Suppose you find an option with a delta of 1.   A dollar for dollar gain is great but check out the example below:

                     Example:   Looking at two separate strike prices for the same stock 

                                             GM      General Motors is 24.37 a share when you buy the option.

                                               The premium for an option with a delta of 1  is  7.50

                              So a 1 dollar move in the stock will give you a 1 dollar move in the option premium.

                                                         Divide 1 ($ gain) / 7.5 (original price paid) =  13% gain.

                 But a delta of .60 has a premium of 1.25, stock moves up a dollar and option moves up 60 cents to 1.85 (1.25 + .60 =1.85)  

                                                         Divide .60 (gain) / 1.25 (original price paid) =  48% return!

Call                                                                                                                                   

Strike        Symbol                                       Bid             Ask             Delta       Gamma    Theta        Vega          Rho

17.00         GM Nov 17 2012 17 Call             7.2              7.5              1.000         0.000         0.000         0.000         0.017

18.00         GM Nov 17 2012 18 Call             6.3              6.7              1.000         0.000         0.000         0.000         0.018

19.00         GM Nov 17 2012 19 Call             5.45            5.5              0.998         0.003         0.000         0.000         0.019

20.00         GM Nov 17 2012 20 Call             4.45            4.55            0.989         0.013         -0.001        0.002         0.019

21.00         GM Nov 17 2012 21 Call             3.55            3.6              0.960         0.039         -0.003        0.007         0.020

22.00         GM Nov 17 2012 22 Call             2.66            2.7              0.891         0.086         -0.006        0.014         0.019

23.00         GM Nov 17 2012 23 Call             1.87            1.9              0.767         0.141         -0.009        0.023         0.017

24.00         GM Nov 17 2012 24 Call             1.2              1.25            0.600         0.179         -0.012        0.030         0.013

25.00         GM Nov 17 2012 25 Call             0.7              0.73            0.416         0.180         -0.012        0.030         0.009

26.00         GM Nov 17 2012 26 Call             0.39            0.4              0.256         0.149         -0.010        0.025         0.006

27.00         GM Nov 17 2012 27 Call             0.2              0.22            0.140         0.103         -0.007        0.017         0.003

28.00         GM Nov 17 2012 28 Call             0.1              0.12            0.068         0.061         -0.004        0.010         0.002

29.00         GM Nov 17 2012 29 Call             0.05            0.07            0.029         0.031         -0.002        0.005         0.001

A solid strategy for an options trader is to look for an option’s delta in the range between .60 and .80 for the best return percentage.

For more information and trade ideas on options, visit my website:  www.marketfy.com/product/options-scout