Option Trading Strategy: Trading as a Business Video 3 Part 11


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Let me show you what I mean by positive and negative Delta, here. On the calls, you have Delta. Delta is the rate at which the option will move, for every one dollar move, in the underlying stock. Delta is higher when the option is “in the money”.

For example, let’s take this. You can see, as you go up here, that the farther the options are in the money, the higher their Delta. What does that mean? Well, let’s say the price of the SPY goes up 1. We had one of the 133 strike calls. This call is expected to increase in price, if the SPY moves up by 1. You take the .73 Delta, multiply it by the dollar move, and you get a 73 cent increase in the price of that option. That’s how that option will move. It will increase by 73 cents.

The closer you get to “at the money” options, the lesser the Delta. Many people purchase these “at the money” calls, and the Delta of the “at the money” calls is only 49 cents. In other words, if the SPY moves up $1, this option will only increase by 50 cents. There is not a dollar for dollar increase in the price of that option, as the SPY’s move up.

The father you get into the money, you can see that – if you purchased an extremely deep “in the money” option, the Delta is 95. Actually, if the price of SPY goes up by $1, this option will increase by 95 cents. This is an almost perfect 1:1 ratio on the move in this option.

When you purchase an option that has a high Delta, 55, and you sell – for example, on this one right here, if we were to buy a vertical spread, and we bought this option that had a Delta of 55, and we sold this option that had a 49… All you have to do is subtract these two. The 55 minus the 49 is 6. You would have a positive Delta of 0.06, or 6 cents.

Let’s try it. We’re going to buy a vertical spread, and then we’re going to analyze it. You can see that the Delta is a positive 6. It’s almost approximately $6. The Theta is negative.

Let’s go back again, and this time, let’s sell it. We’re going to sell a vertical spread. Now, what we’re doing, is we’re selling a call with a higher Delta than the one that we’re buying. Now, we should be very close to a negative $6 in Delta, and a positive Theta.

That’s exactly what we have. We have a negative Delta, and a positive Theta. What we want to do now – and that’s why, primarily, we tend to sell options, rather than buy them. We sell them for more than we buy them for, like every good business does.

As I was saying, we don’t want to purchase an iron condor. We want to sell an iron condor. In some cases, it does make sense to buy iron condors, if you think a very large move in the market is coming. However, in our case, in most cases, we tend to sell iron condors.

We’re going to be selling the 141 and buying the 142. Why? Let’s take a look at the Deltas, for a second. Actually, I would rather sell this one, with the 25 Delta. We’re going to go up to the 142, and we’re going to buy the 143.

On the put side – because it brought this up automatically – on the put side, we’re going to go down to a Delta of -24. Puts always have a negative Delta. Calls always have a positive Delta.

We’re going to sell, right around the 24 Delta, which is the 132 strike. We’re going to buy the 131 as protection. Remember, we don’t want to sell naked options.

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