You always point out the delta when buying an option. Is it better to have a high delta or a low one? (October 20, 2006)
An option delta measures approximately the change in the option price for every $1 change in the underlying stock price. For example, if a call option has a delta of 50 (it can also be shown as 0.50), for every $1 the underlying stock moves up or down, the option will move, all other things equal, 50 cents. A put option delta is designated as a negative; if the stock moves up it moves down and vice versa. Typically the deeper in the money and the closer to expiration, the higher the delta.
As the delta represents the percentage the option will move in relation to the stock, the higher the delta the better the move. We prefer higher deltas for various reasons. One of the primary reasons is that the option will move better when the stock moves and that makes us a better profit on the play. Getting a higher delta, however, has to be balanced with the cost of getting that delta. If the cost is high the precentage gain may be less even though the higher delta option generally increases in value more rapidly.
We always look at the available options to see if it is a better value to buy a closer to the money option than a deeper in the money option (e.g., a $12.50 strike call option on a $13 stock as opposed to a $10 strike call option) even though that deeper in the money option has a higher delta. The idea is to get the best value for the price that will deliver the best return. As a general rule we like a higher delta, but we always then run the numbers to see what the anticipated profit will be given the anticipated move in the stock.
|Previous Page||Next Page|