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Learn This Lesson Once and Profit Many Times Over

Written By Trading Forex News on Saturday, October 10, 2009 | 10:28 AM

This is third part of my series on understanding "delta," in which I have been focusing on the benefits of trading in-the-money (high-delta) options and how time impacts option values.

If you missed them, check out Part I and Part II. This series could save or make you several thousand dollars (or more).

We're just starting to scratch the surface of how trading high-delta options can enhance your profitability.

Understanding delta could mean the difference between trading the right option contract that gives you low risk and high reward, or trading the wrong option contract that exposes you to unnecessary risk.

Just to refresh, delta is the ratio comparing the change in the price of the underlying asset (such as a stock or exchange-traded fund) to the corresponding change in the price of an option contract.

We have been talking about it, not so much as a tool or a calculation, but more as a concept. The goal is for you to have a clear understanding of the reasons option prices change the way that they do.

Once you "get" that, you'll understand how and why trading options actually holds less risk than trading stock.

I'll keep talking about it conceptually, because it is most important to understand the concept. And, if you sit here and try to figure out how to actually calculate delta on your own or what the calculation is, you would really be missing the forest for the trees.

How options react when they are a certain distance away from their strike (or exercise) price is what is important here.

By fully grasping the concept of delta, we understand why it pays to buy in-the-money options (giving you a higher delta) as opposed to trading riskier, lower-priced, out-of-the-money options.

by Chris Rowe

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