Delta for Timing of Options Trades
Among the “Greeks” the most valuable for options trading (and specifically for timing of trades) is the delta.
This indicator compares likely change in option value relative to change in the value of the underlying. The higher the delta level, the more likely the premium will move pre than movement in the same direction for the underlying. And of course, a lower delta reveals a less responsive likely reaction among option contracts, to movement in the underlying.
Because delta measures reaction of premium to underlying, it can be viewed as a reliable test of extrinsic value (implied volatility). Because of this, as you would expect, the delta strength or weakness is going to vary based on two factors: proximity of strike to current underlying price, and time remaining until expiration. The closer underlying price is to strike, the more responsively you expect IV to behave.
The same is true for time to expiration; very long-term options are going to be less responsible than those closer to expiration. However, these two factors -- time and proximity -- interact to define the delta level.
The range of delta varies between a high of +1 and a low of -1. Call delta is always expressed as a positive attribute, and put delta is always expressed as a negative.
For example, American Express (NYSE: AXP) closed on May 11, 2012 at $59.64. As of that close, the May 60 call delta was 0.4237, and the May 60 put delta was -0.5765.
Comparing delta between two or more issues invariably produces interesting results. For example, on the same day, Boeing (NYSE: BA) closed at $73.56. The May 72.50 call’s delta was 0.6780 and the May 72.50 put’s delta was -0.3219.
In the first example, the call was barely in the money and the put barely out. In the second example, it was reversed. The May call was slightly out of the money whereas the put was slightly in. Even though the degree of ITM and OTM was very slight, note the large differences in delta levels.
Long call delta is a positive factor if the underlying price is rising, but for short calls, it is a negative factor. For long puts, delta is a negative factor if the underlying price is declining, and for short puts, delta is a positive factor if the underlying price rises.
Calculation of delta is not necessary as several free online calculators are available. The Chicago board Options Exchange ("CBOE") provides free calculations for all of the Greeks. Go to
CBOE Option calculator to find CBOE’s calculator.
All option strategies rely on timing, notably for short sides of combinations. Implied volatility rises and falls and you will get maximum premium for the short positions when IV is exceptionally high and this is what delta measures. So you benefit from tracking IV on the stocks you own, as part of your options strategy.
A volatility-based strategy can be complex without help, but it can be simple and easy with the right tracking tools. To improve your option trade timing, check the Benzinga service Options & Volatility Edge which is designed to help you improve selection of options as well as timing of your trades.
© 2016 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.