Options Theory: Options Greek Delta Measures Direction
December 30, 2021
This is part two of a three-part series on the options greek delta. Part one focused on how delta measures probability and can be found here.
Today we’re spotlighting how delta measures directional exposure.
Notes
Delta reflects DIRECTIONAL EXPOSURE
2) Delta tells you how much money you make if the stock rises $1.00
A) Buy call with a 0.60 delta, I make 60 cents per share per $1 move in the stock.
B) Buy call with a 0.90 delta, I make 90 cents per share per $1 move in the stock.
C) The higher the delta, the more sensitive your position to stock price movement.
Bullish: Positive Delta: Long Delta: Long stock, Long call, Short put
Bearish: Negative Delta: Short Delta: Short stock, Long put, Short call
Delta range between 0 and 1, per share (0.75)
Delta range between 0 and 100, per contract (75)
The higher the delta, the more exposure you have.
The lower the delta, the less exposure you have.
Two trades:
A) Bullish on AAPL, build a trade with a 50 delta: More aggressive
B) Bullish on AAPL, build a trade with a 10 delta: Less aggressive
Bullish options strategies:
“Net Delta”
Buy a call with a delta of 60.
Sell a call with a delta of -30.
Net Delta = 30
Strategy Application:
1) Directional/aggressive trades (-3,+3): High Delta
A) Long call, long put, bull call, bear put
2) Cash flow/non-directional/conservative trades (-1,0,1): Low Delta
B) Naked put, bull put spread
Long Call: Buy ITM call with a delta around 60.
Bull Call Spread: Buy ITM or ATM call, sell OTM call such that the net delta is around 25. (i.e, buy 60 delta call, sell 35 delta call)
Naked Put/Bull Put: We don’t care as much about the net delta in terms of measures our directional exposure. What’s more important is using delta to reflect the POP. We care more about profiting from time decay.
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