You have likely heard about options trading before and “the Greeks”.
Today I will be telling you all about options delta and how to apply it to your trading strategy.
Using options delta during the analysis and trading process will help you find higher probability and lower risk trading opportunities.
What is Options Delta?
Options delta is defined as the amount an option price will move if the underlying moves $1.
Therefore, if an option has a delta of 0.50, it will move $0.50 for every $1 of underlying movement.
You will recall that every options contract is typically for 100 shares, so a $0.50 move times 100 shares is a $50 total move for one options contract.
Therefore, the delta is a way of calculating how much money you will gain, or lose, given that a stock moves $1 in either direction.
Options delta ranges vary from 0.01 to 1.00, although it rarely gets to either of these extreme values. You will mostly notice that options contacts stay in the 0.30 to 0.70 range.
But what is the significance of values in this range?
Let’s take a look at that now.
Where to Find Options Delta?
Every options trading software should allow you to pull up an option chain (option price quotes).
If this is not the case for you, I strongly recommend switching to a provider that will show you more advanced analytics, like Interactive Brokers here.
Once you can access options chains you will have full access to options delta and more.
Here is an example of an options chain for Apple stock, currently trading at $151.55 a share. (click to expand image).
Looking at the graph, you will notice that the 6th column from the left shows the options delta values for call options. While the 4th column from the right shows the options delta for put options.
The $150 calls and puts are closest to the market price of Apple shares and are called the “at the money” options.
Notice that option strike prices that are close to the market have approximately 0.50 delta values.
The deeper the option is “in the money”, meaning it has immediate benefit, the higher the delta. However, the cost of the option is also higher (1st column from left, and 9th column from right).
So which one should you use for your trading, and does it even matter?
Options Delta for Swing Trading
Before I explain the options delta values, I need to focus on one style of trading. Because we teach passive options trading in-depth, I will choose to focus on swing trading.
This means you are holding the position for several days to several weeks on average.
As you will notice in the image above, you can see that options with higher delta values cost more per contract. This is because they provide the most value if the stock moves $1.
Cheaper costing options come with a much lower delta, which means you will make less money as the stock moves. Therefore, it will take much larger stock moves to make the same money as you would with a higher options delta contract.
There is a very fine balance between cost and expected profitability. In fact, this is where market makers earn their living – keeping prices to a tight spread with high liquidity.
While this is a very complex topic that we cover in-depth in our options trading course here, we have come up with a general rule.
In general, if you plan to swing trade options you should look to purchase the contract that offers 0.60 to 0.75 options delta.George Papazov, Options Trading Course
Options Delta Example with Apple Stock
Now let’s jump into an example to illustrate the effect of options delta.
Let’s assume you have done your technical analysis and believe that Apple is going up in the next few weeks. Thus, you want to purchase call options to make a profit.
Looking once again at the options chain for Apple below:
Apple stock is currently trading for $151.55, and you buy the 0.61 delta call option with the $148 strike price. This option is currently trading for $8.65. Overall, you will pay $865 ($8.65 * 100) for one contract.
In two weeks, the price of Apple stock is up to $161.55 for a $10 gain per share.
How much is your contract worth according to options delta?
The $10 gain times the 0.61 delta equals to $6.10 per contract. Now you multiply by 100 to get a total profit of $610.
Putting this in another context, a $10 move per share on Apple is a 6.6% gain on your investment. Meanwhile, this same move is a whopping 70%+ gain.
Wow, can you really make a $610 profit on just an $865 investment?
YES! That is the true power of options, and you can learn how to trade them using a passive strategy with high probability. Learn more about our options trading course here.
Options Delta Deeper Dive
Now that you understand options delta, it’s time to take a deeper dive into our next article.
Because options pricing is not linear, every $1 change of delta actually leads to a greater increase for future delta.
In order to get a deeper understanding of options delta we have to dive into the rate of change of delta, called “options gamma”.
Stay tuned for the options gamma article coming soon.
Options Delta Conclusion
This is a must-use tool for any options trader. Understanding delta is just the beginning of creating a consistently successful trading strategy.
You can access our full course to help you create your very own strategy, and learn options trading like a professional here.
Thank you for reading, and I would love to answer your questions in the section below, ask away!
Good luck and good trading.
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.