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Turn Your Deltas Into Dollars

Written By Trading Forex News on Saturday, October 10, 2009 | 10:23 AM

In the first installment of my five-part series on options delta, titled "The Most Important Lesson for Options Traders," I started to teach you about the importance of understanding delta when trading options.

One thing that I want to discuss in the second part of this series is the fact that there are so many options available to trade on each individual stock that expire in one particular month that it might be easy to misinterpret what I was saying last week about how to harness the power of delta to choose the best options to trade.

To review, I told you that, by purchasing deep in-the-money options, you give yourself a high delta, resulting in an option that moves up in value more (point-wise) than an option with a low delta as the stock trades deeper and deeper in-the-money.

For example, if XYZ trades at $50, the XYZ April 45 Calls will move up more (point-wise) than an XYZ April 50 Calls.

So, the deeper in-the-money you go, the more the movement in the stock's price will be reflected in the option's price.

Going, Staying In-the-Money

But this works on both sides, which is why you don't want to go too far in-the-money.

You have to have a balance between buying deep in-the-money calls, and still staying relatively close to the stock price.

Why?

Because if you buy a call that is too far in-the-money, you cannot only make 98 cents on a 1-point gain in a stock, but you can lose 98 cents on a 1-point loss in the stock. And you want to enjoy the benefit on BOTH sides of the trade.

by Chris Rowe

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