DO YOU HAVE A SLOW DANCER?
Did you ever wonder what makes one option strike price move up/down more than another? No? Well, you need to learn more about deltas! Delta is the amount by which an equity option's price will change for a corresponding one point change in $ price by the underlying entity. You can have eight option strike prices and only one or two will move dramatically during trading days.
Calls options have positive deltas, while Puts options have negative Deltas. During the trading day the deltas will fluctuate.
Doug's web site breaks down the deltas for options. You can use that knowledge to leverage or protect your CC purchases. For example, if you want to exercise the stock eventually but are buying the option first, then you might want to go with the highest delta you can afford. High delta options tend to be more in the money. So, they will seem more expensive. Actually, they are cheaper in the long run since you will be able to exercise at a much lower strike price and capture more of the upside moves.
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On the other hand, if you anticipate a downward movement in the stock price, you can write (sell) a high delta CC and stick it to your CC buyer. Why? Because as the stock drops the value of the CC will erode very fast. That is, the delta will do the work for you! Hence, you can cover sooner and pocket the majority of the CC premies. Also, if you are close to expiration and the strike price of your CC is out of the money, it is possible to do nothing until the day before expiration and only pay 1/16 or 1/8. |
