Understanding Delta in Options Trading
By J. Brumley
Link
Background material:
This is material you need to understand to understand the strategy discussed in the article:
Delta is one of the ‘Option Greeks” those characteristics and numerical indicators which explain how a Put or Call option should change over time. Delta is commonly defined as the amount of change you can expect in the price of an option for every 1$ dollar change in the price of the underlying asset.
Article review:
In this article J. Brumley discusses the advantages of trading “in the money” options because of high “delta”. In the money options tend to have higher deltas which make their prices or value increase by more the at the money or out of the money options when the price of the underlying asset rises. Additionally, it is because they are in the money that their price or value doesn’t drop as quickly as at the money or out of the money options when the price of the underlying asset falls. These two characteristics make these options better buys then their counterparts “at the money” and “out of the money” options for traders who are mainly buyers of options looking to make profits on small positive price changes before expiration. However they are more expensive. The article goes into more detail about how this works.
Prior to reading it, I suggest you review these trading terms, then click the link below.
Terms for review:
Moneyness
Moneyness is a term describing the relationship between the strike price of an option and the current trading price of its underlying security. In options trading, terms such as in-the-money, out-of-the-money and at-the-money describe the moneyness of options.
In-the-Money (ITM)
A call option is in-the-money when its strike price is below the current trading price of the underlying asset.
A put option is in-the-money when its strike price is above the current trading price of the underlying asset.
In-the-money options are generally more expensive as their premiums consist of significant intrinsic value on top of their time value.
Out-of-the-Money (OTM)
Calls are out-of-the-money when their strike price is above the market price of the underlying asset.
Puts are out-of-the-money when their strike price is below the market price of the underlying asset.
Out-of-the-money options have zero intrinsic value. Their entire premium is composed of only time value. Out-of-the-money options are cheaper than in-the-money options as they possess greater likelihood of expiring worthless.
At-the-Money (ATM)
An at-the-money option is a call or put option that has a strike price that is equal to the market price of the underlying asset. Like OTM options, ATM options possess no intrinsic value and contain only time value which is greatly influenced by the volatility of the underlying security and the passage of time.
Conclusion:
The article does a good job of explaining the advantages of buying high delta options because less value lost with drops and more profits gain from asset price rises. And it explains how you might work this strategy into your trading routine. I recommend it highly because once you understand high delta trading of in the money options it’s easier for you to expand your trading repertoire to in the money spreads, plus conversely gain a better understand of out of the options, one of the bread and butter components of high probability option spread trading. Article Link.
✍🏼 by Shortsegments.
