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Strategies & Market Trends : Buy and Sell Signals, and Other Market Perspectives
SPY 672.07-1.7%4:00 PM EST
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To: GROUND ZERO™ who wrote (77674)1/6/2016 2:08:41 PM
From: Hank Scorpio  Read Replies (1) of 218768
 
I have good success with DELTA's in the .50-.70 range. Here's the thing. A .50 DELTA with deliver approx. 50% of the stocks underlying movement. A .50 DELTA option - front month - can easily be had for around $5 for SPY. (it can actually be less) So, for $500 you are controlling a $20000 grouping of shares. Shares go up a $1 you make $100 on the share and $50 for the option. You could buy two options, and risk $1000 to mimick 100% the movement of 100 shares. (I'm using current numbers)

Time value degradation is a separate issue of course, but my trades are 1-5 days in length.

Now to go to the .95 DELTA, that will cost you at least $25 for SPY. You could get by with one option to get close to the 100 shares, but it costs you 5 times as much risk capital.

And one thing I have found is quite nice, as the option move more ITM the DELTA improves. Vice versa. It actually tends to help a lot. This morning, for instance, I was long. (part of my system went long yesterday and you can't trade options over night) My long SPY is currently down .87. I just kept them. SPY is down 2.56. You can see that the DELTA dropped significantly. I will have to take the loss if the markets don't rebound fairly soon - time premium erosion will eventually kill it - but it provides great peace of mind knowing that the losses are minimized two ways.

First, I only risked $350 per option. Second, the DELTA drops as the market goes against you.
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