Option Delta: How much Bang do you get for your Buck?






The delta of a stock option is how much it moves in relation to the underlying stock dollar for dollar. A .50 delta means it moves .50 cents for every dollar the stock moves, a .90 delta means the option captures .90 for ever dollar move in the under lying.

At the money options tend to have a .50 delta because it is a 50/50 chance that the options will expire in the money and the holder will get intrinsic value. If Apple is trading at $660 the $660 strike has 50/50 odds of being in the money at expiration, it can move either up or down.

When Apple is at $660 a $685 weekly call option may have only a .10 delta because it only has a 1 in 10 chance of closing in the money, so it will move only a dime for every dollar that Apple moves.

Delta is about the probabilities of an option contract having intrinsic value at its expiration, a deep in the money $620 weekly option may have a .95 delta when Apple is trading at $660 becasue it is a 95% chance that it will close in the money at expiration. With deep in the money options it is like you own the stock because you are trading based   intrinsic value not probabilities. When you buy an in the money option it is basically like you are insuring intrinsic value for the holder and you get the full upside for your risk.

Far out of the money options have terrible odds and are more like lottery tickets than investment vehicles. Also if you buy at the money options you have to overcome the theta and vega premium above intrinsic value first before you can become profitable, but that is for another blog post.

This is why I play in the money options, I win or lose based on the stock price alone with no need to overcome theta costs, vega costs, or odds that are not in my favor.