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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe) -- Ignore unavailable to you. Want to Upgrade?

To: steve armon who wrote (784)	3/18/1998 10:42:00 PM
From: Madpinto	Read Replies (1) \| Respond to 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

To: steve armon who wrote (784)	3/29/1998 1:51:00 AM
From: ----------	Read Replies (1) \| Respond to of 2241

Michael covered delta fabulously. I always wondered what it was. He also explained why sometimes spreads get filled & sometimes not. I never knew that. Thanks, Michael. In theory, a spread as I believe you are implying, means you have less money at risk in exchange for limiting your gains. if you buy a xyz may 50 call for $2. and you sell a xyz may 55 call for $1. , you have a net investment of $100 (commissions excluded). Your maximum loss is $100. Your maximum gain is 55 - 50 =5 -1 =$4. Anything between 50 & 55 belongs to you. Once the stock goes above 55, gains belong to whomever bought the 55 call. Under 50, the guy who sold you the 50 call gets to keep your $200 without delivering anything. When rolling options, I always enter them as a spread. It is much safer to do so, imo. Michael explained rolling options accurately. There is a standard question virtually everyone asks themselves before rolling options:" O.K., how am I going to get out of this mess?" <g> I'm currently rolling some Dell puts I sold before it split, because "Dell will go up after it splits." Wrong! It dropped faster than Tiger Woods drops a 2 foot putt. That left me either buying Dell at a price a lot higher than the current market, or using the question above.<g> Regards, Doug