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
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