In this post, I’m going to try to simplify the options Delta for you in this video.
I’m just going to make it real simple. We’re not going to get into the jargon of the stock market just yet.
But we will go on the screen. I’ll show you some examples, but to make things simple, let’s go to the screen on paper and do some basic examples of the option Delta.
All of these Greeks are the risks.
That’s all they mean.
And you’re looking at a control center and gauges when you’re looking at the risks. Is it a little high, or is it this way, is it that way? Is it straight up? Where are the risks?
What’s the problem?
Well, you have different risks.
You have:
- price risk
- time risk
- vega risk
Those are your issues. If you have health problems, you have different risks. Maybe you have hereditary, or let’s say history risk. You have weight risk, and perhaps you have cholesterol risk.
There’s a different risk in anything in life. And when it comes to options, you have a price, time, and Vega – that’s the main ones.
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Delta just means price risk. Is the stock going up, or is it going down? That’s all it means.
That’s all it tells you. And if we look at a price graph, this is the money you make, and this is the price of the stock.
As the price of the stock goes up, are you going to make money or lose money?
If the stock goes from 150 to 200, are you making more money, or are you making less money?
You’re making more money.
That’s all it means – Delta, you’re going up.
Now, take a look at the second graph.
Let’s say you have the stock around 200. Now, as the stock goes higher, are you making or losing money?
You’re losing money.
If the stock goes down, are you making money or losing money?
You’re making money.
Don’t worry about if you’re a buyer or seller. In this case, this is what it tells you. This is what Delta is all about. Here you’re a short seller. How do I know? Well, because you’re making money as prices go down. Because your Delta is negative.
Here (left graph), you’re making money as the stock price goes up. Here you’re a normal buyer, an investor. That’s all Delta does, and it tells.
Let’s say you have a stock like Microsoft. You have one share, and the stock price was $180 a share.
Delta tells you the amount you’re going to make or lose per dollar. That’s the important part – it’s per dollar move in the stock.
Here’s a quick chart.
If you got it at 180 (you got one share) and if that stock goes to 181, how much did you make?
You made a dollar. That’s all it tells you. You made one dollar.
And if you have five shares, you multiply this times five.
If that stock goes from 180 to 181, how much did you make? Well, you made $5. So, what’s your Delta? This is your Delta.
For every $1 move that stock made.
Let’s look at it the other way. You had a delta of three that means you make $3 for every $1 move in the stock – which also means you have three shares.
If you had 250 Delta, then you make 250 for every $1 move in the stock. It doesn’t matter which stock.
If you want to look at options, it’s no different. What is the option worth or value?
Let’s look at it on the option side. Options are no different. The only difference with options is that options have their own Delta.
You have calls, and you have puts. Certain calls are going to be lets say 0.75 Delta. Others might be 0.65 Delta. Some might be 0.10 Delta. There’s going to be different values there.
Puts – they’re usually going to be negative Delta. They’re going to be negative Delta because if you buy a put, you’re looking for the stock price to go down. So these are negative Delta.
This might be like a negative 0.37, negative 0.42, negative 0.63 Delta.
These are negative, and these are positive. That’s the only difference.
If I buy Netflix and buy one share, what does it look like?
As I move my mouse, if I have one share at 365 right now, my profit and loss is at zero. If that 365 goes to 366, how much do I make?
I make $1.
If it goes to 367, I make $2 because the Delta right here is one. Gamma and theta are gone because stock on its own doesn’t have those things.
No matter where you are that slope, it’s the slope of that line – which is price risk. That’s because the price goes up or down while you make or lose money. If I had two shares look at my Delta – it changed to two,
Let’s reset back at zero. I bought the stock at 365. It goes up a dollar; the stock goes up a dollar. How much would I make? Delta 2 – I have two shares. If it goes from 365 to 366 with two shares, you’re making a dollar on the stock times two shares.
You made two dollars. I hope this makes sense to you. You can ramp that up to 102, and then you’d make a $102.
Yeah, absolutely.
All this does is tell you the slope. Let’s say I go to the negative. Let’s say I’m a short seller. Here in this way, it worked the same way but the opposite.
Remember, the bid-ask spread here is a little bit of an issue. I’m starting at negative 200, so my Delta here is negative 100.
If it goes to the downside, then I make money.
Here 365 goes to (right now I’m down 200) 363m well I’m back at 0. I did $2 move with a hundred Delta. If I go the other way, I lose money. If I go to 366, I’m going to lose 297.
If I go to 367, I’m going to be down another $100. So almost $400. If I go to 368 because the stocks are going up and in this case, since we’re short, I’m going to lose another hundred.
It works the same way if you’re positive if the stocks are going down, you’re losing money. If it goes down to let’s say 360 take a moment, do the math. It went from 365 to 360 with a hundred Delta – what do you get?
Negative 500 – you’re down $500 because 100 shares that’s your Delta times the movement (which was 5) – 5 times 100, and you get 500.
When we look at options, it’s a little more complicated. That’s the case because of every options worth a certain amount.
You could pull some of these things on the quotes and go to the Delta. Now you can see them. Here you can see we have a delta almost of one, like a stock.
Otherwise, you have like 0.45 and 0.36, and if you look at the puts, you have the negative, as I mentioned.
All the puts are negative.
If I buy a single, you got a delta of 43.
What does that mean?
That means for every dollar move, I make $43 or lose $43. If it goes to the upside (because I’m positive), I make $43. If it goes down, I lose $43.
With options, there is one thing to keep in mind. Remember, this has a curve. That means that Delta is going to change.
Look, now it’s 53. Now it’s 59. That Delta does change in option trading with stocks; it’s all the same. That’s because it’s the amount of shares you have.
With the time value and all these things (volatility), it’s all going to shift. But ultimately, the Delta gives you a rough idea and perspective thereof the price risk that you have at this exact time on that option contract.
Here I have a 46 Delta. If I have a $5 movement in the stock, I could be in trouble. That’s the whole point of knowing and understanding the Delta.
If that’s a big number for you and a $5 move, let’s say it goes to 370: 205 is a big win or a big loss. Let’s say here went down about 350, you’d lose 646 because of course the Delta.
And if you had more contracts (6 contracts) all of a sudden that same loss instead of 600 could be $3,900. That’s a delta in a nutshell, and this does apply to spreads.
If I go into an iron Condor and this one’s a little more skewed. You could have a positive Delta here. I could skew it the other way. Give me a second here.
Now I have more even of an iron Condor, which gives me a little bit of a negative Delta.
You can see here I have a negative 7.82 Delta. This is not the same thing as delta-neutral strategies when you’ve heard of delta neutral strategies and concepts before. It’s not because when you’re thinking or referencing delta-neutral, you’re taking Delta into account with all these other Greeks. And more importantly, here the Vega.
As a simple form and an explanation, if you have a negative Vega, it’s good to be a little short Delta. If you wonder how much? Well, it depends on what you’re trading and what you’re doing in the market conditions.
But in other words, that makes it a little more neutral of a strategy. I hope this gives you a little insight into Delta.
Take a look at this sheet right here.
It’s telling you the price risk. And if you’re a buyer, as prices go up, you’re making money. That’s what it’s telling you.
If you’re a short seller, as stock prices go down, you’re making money.
With Delta, you’re looking at the price risk. With theta, you have time risk and with Vega – volatility risk.
For every $1 move in the stock, that’s the amount you make or lose.
If you had a delta 3, you would make or lose $3. If you had a negative, it’s the opposite.
That’s what I wanted to share with you today. I wanted to talk about Delta and simplify it on paper.
People make it so much more complicated than it is. It’s just the price risk looking at things how much they move up or down.
Your profits – how much where they move up and down relative to the stock price.
Keep it simple. Don’t make it more complicated than it has to be.
