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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT... More
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Getting Started in Stock Investing and Trading
  • Delta Trading – Relative Measurement 0 comments
    Mar 23, 2014 11:00 AM

    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 more 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 m ore 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. Comparing delta between two or more issues invariably produces interesting results. 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 (NASDAQ:CBOE) provides free calculations for all of the Greeks. Go to CBOE Option calculator to find CBOE's calculator.

    To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at ThomsettOptions.com to learn more. You can take part in discussions among members on the site at the Members Forum.

    I also offer a monthly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. Join at Newsletter - I look forward to having you as a subscriber. Please also check out my other site, ThomsettStocks.com

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