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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe)
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To: steve armon who wrote (784)3/18/1998 10:42:00 PM
From: Madpinto  Read Replies (1) of 2241
 
they describe something called a delta
Good question. First of all, let me warn you that options have many nuances, and you should be in no hurry to jump in. I'm sure you can find testimony to that fact right here on this board. OK, a delta is a tricky little thing. One rule of thumb traders use on the floor (not scientific) is to say the delta is the percent chance the option will end up in the money. So if the call is right at the money, it usually has about a 50 delta. (Some books use .x out of 1, I like to use x out of 100.) A delta tries to approximate the share position of the option. An option represents a 100 shrs. of stock and a delta represents some portion of that. An at the money call with a 50 delta should behave like 50 shares of stock. If the stock goes up a buck you would expect the call to increase by 50 cents. Unfortunately things don't work out quite so neatly for us. First of all, all other factors must stay the same. If volatility goes down as the stock goes up, the calls may not rise by the full amount. They could stay the same price or even go down! Also, as the calls become more and more in the money, the delta will change. The delta increases as the probably the options will finish in the money increases. Imagine the stock has five seconds before it closes. An at the money call would have a 50 delta. The stock could tick up and the option would go to 100 or it could tick down and the option would go worthless with a zero delta. (Forget about the stock staying right at the strike price for now.) Deltas help traders estimate how much stock to trade versus options positions to stay hedged. The call delta minus the put delta should equal 100 most of the time (puts have negative deltas.) As the call delta goes up, the put delta goes down (in absolute terms.) So if the delta of the call goes from 65 to 75, the put delta should go from 35 to 25. As for your question on spreads. I believe they do have less risk than straight options. Unfortunately, you may have a difficult time getting in and out of the spread due to wide markets. Spreads have no standing in the crowd also. This means the broker has no obligation to fill your spread even if it looked like he could have. You can usually test the crowd by quoting a spread and seeing if the crowd gives you a better market for the spread than you see on quote screen. Good luck
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