Would you please discuss deltas on options and how you use them?

The delta for an option tells you how much an option will move given a $1 move in the stock. For example, if a stock has a delta of 50, that means for every $1 a stock moves, up or down, the option will move 50 cents in the same direction. The delta is set by formula, but note that it can change with rapid moves in the stock. The farther a stock gets into the money, the higher the delta. Eventually, you will see almost a dollar for dollar move in the option with the stock.

We like deltas of 75 or better. That means, for every dollar the stock moves (up or down), the option should move $0.75 in the same direction. The bigger the delta, the quicker you can hit your target profit price (or your loss price). Sometimes it is difficult to find a reasonably priced 75 delta option on some of the more volatile and popular stocks. There, you may have to drop to 68-70. For example, today we were looking at AMCC when it started to move up. When the stock was up $6 we looked at the May $260 call. The option was around $58 to $60-pretty stout. The delta was 63. Not a really great deal: shell out $60 per option and only get 60 cents for every dollar move. Now after today’s strong move in the stock the delta on the May 260 call may be recalculated (the stock closed at 276), moving the delta higher. Thus future moves may return better gains. That is the effect of the stock being further in the money.

Where can you find out an option’s delta? A full service broker can give it to you, and many online brokers have that service available if you have an account. Realtime services such as eSignal have the feature as well. As of now, we do not know of any free site that provides delta information.

When considering entering a play, we weigh the delta as one factor. If the pattern looks strong and the stock can really fly, we will accept a lower delta. We have to factor in, however, how far the stock can run on the move, i.e., is there resistance to worry about that could cut it short. When putting out a lot of money for an option with a lower delta, we want the pattern to be a great one with no obstacles in the way.

Information on Deltas:

As usual, our subscribers came to the rescue with information for deltas on the web. Thanks for the help!

“The CBOE site offers a free download called the Options Toolbox at http://www.cboe.com/education/software.htm A few quick entries (stock price, strike price, interest rate, option expiration, and current option Bid or Ask) and you get a handy, liquid delta calculator for use on the fly. Once you get used to it, it takes less than a minute to get plenty of useful info, I often figure % increase to double using this tool before I even get into the position, although the volatility percent (which is also calculated for you) will usually give you a good handle on this. Just wanted to share this info, FYI.”

“The free portion of optionetics.com provides delta and other greeks free (including volatility).”