If you’re new to options trading, there are many different moving pieces you’ll need to understand.
You should understand the factors that could affect your options position, depending on whether you’re long or short. One of the most important factors to take into account when directionally trading options is the underlying the price. To risk manage directional options trade, you need to understand the implications of changes in the underlying stock price.
What Is Delta in Options Trading?
Delta in options trading is one of the four major measures of risk that analysts use to understand the risks entailed in purchasing an option. Delta tells you the degree that an option is exposed to shifts in the price of the underlying security, whether that is a commodity (for example, a futures contract) or a financial asset (e.g., a stock).
Options Trading: Delta Explained
When you’re getting started in the world of options trading, there’s a lot to learn. Now, there are factors that can affect an option’s price, and you should understand which ones matter the most. We’re going to go over the factors affecting options prices in this options trading series. The options market uses sensitivities, or the Greeks, to let them know how much their positions will be affected based on changes in specific factors.
If you haven’t gone over the basics of options yet, make sure you check out the differences between call options and put options before diving into the rest of this article and learning about expert-level metrics like delta in options trading.
Depending on your brokerage platform, you should be able to show the Greeks when you’re trading options. The delta provides you with a snapshot of how your options position is affected when there’s a change in the underlying stock price.
Basically, the delta of a position, whether it be positive or negative, tells us which direction we want the underlying stock to go for the options to make money.
For example, take a look at thinkorswim’s platform. You’ll notice there are different columns, these are known as the greeks. There’s delta, gamma, theta, and vega, which are some of the most important ones you need to understand.
Now, a positive delta means the option will increase in value if the underlying stock goes up. Conversely, a negative delta means the option will increase in value if the underlying stock goes down.
If you look at the figure above, you’ll notice calls have positive deltas, while puts have negative deltas. That means if you buy call options, those options will increase if the underlying stock goes up. On the other hand, if you buy put options, the options will increase if the underlying stock does down.
How to Use Delta in Options Trading: An Example
Now, take a look at this options chain below.
Let’s look at the $252.50 strike price options for Tesla (TSLA). The calls have a delta of 0.67, while the puts have a delta of -0.34. Therefore, if TSLA moves up $1, the calls would increase by $0.67, or $67 per contract. On the other hand, the put options will decrease by $0.34 if the stock increases by $1.
If you look on the flip side, if TSLA falls by $1, the calls would decrease by $0.67. However, the puts would increase by $0.34, if the stock falls by $1.
There’s one thing to keep in mind,: the delta values could change, and those changes could be measured by the gamma, which is another metric of risk in options trading. We’ll be going over gamma in the next guide of this options trading series. Now, if you want to start multiplying your money, you need to understand the Greeks, among other things.
Ultimately, you potentially could start multiplying your money and hitting trades like this. However, it’s not an easy road and will take time and grit. You could see how the money pattern has revolutionized the reality of profit taking and learn how you could double or triple your money using his simple Options strategy.
Options Trading: The Takeaway
When you’re getting into options trading, there’s a lot to learn. Some of the most important factors to understand are the Greeks. Basically, you need to understand how your options will change when the underlying stock moves, as well as volatility and time to expiration.
For now, just understand:
- Options positions with positive deltas increase in value if the underlying stock goes up.
- Options positions with negative deltas increase in value if the underlying stock goes down.
To learn more about options trading and how to use metrics like delta in options trading, sign up for a consultation with one of RagingBull’s expert traders. We’re standing ready to show you how to use delta in options trading, as well as other metrics and experts’ tricks of the trade, to make money with options trading.
Jeff Bishop is lead trader at WeeklyMoneyMultiplier.com and widely recognized as the Mensa Trader. He runs short-term trading strategies, using stocks, options and leveraged ETFs.