Delta Delta Delta

Hi Shoppers,


My son is just beginning the college application process …


So that means I am also beginning the college process.


Ugh!


It seems so daunting.


Grades, test scores, extracurriculars, volunteer work, accomplishments, yada, yada, yada


OH! Then there is the essay … what to write about?


And choosing the right school … “they” say you should apply to seven to eight. But is each a safety, target or a reach school?


How about visiting the schools in person … or virtually — really!?


You’re going to get a feeling for a college virtually? Please! (Well, maybe University of Phoenix, but that’s different.)


There has been a massive industry built around this whole process.


And after I have — I mean my son has done everything he’s “supposed” to do, I can’t even imagine the anxiety of what it will be like waiting to hear from these institutions.


We will be standing by with bated breath, hoping he’s accepted by them when I think they would be lucky to have him as part of their community. (And I swear, I am not one of those bragging mothers!)


Frankly, I am beginning to get a bad taste in my mouth from these bastions of “higher learning.”


Not only will we be paying them a fortune, but aren’t these institutions supposed to be the place young adults go to broaden their minds and learn to think for themselves?


From what I read in the so-called news, this doesn’t seem to be the case anymore when they are not allowing speakers of all opinions onto campuses.


Isn’t that what we used to call debate? Don’t we usually get a better outcome taking a little bit from each side? (Hello, Congress!?!)


And the whole student loan fiasco … I can’t even go there!


Anyway, what I really wanted to tell you about is one of the Greeks we use in trading.


I guess I wasn’t in a “rush” to get there …


Get it? College, learning, Greek life … well, maybe.


Aaaanyway …


Delta Delta Delta


You may be familiar with the term “delta” related to options …


This is the option’s “moneyness,” meaning where the option’s strike price is in relation to the underlying price.


In-the-Money

In the money, for calls, means the strike price is above the underlying price and the deltas are above 50. 


In-the-money puts have strike prices below the underlying price and the deltas are -51 to -100.


A delta of 100 means the option is stock-like, it is deep in the money and it will move one-to-one with the stock, with calls moving in the same direction and puts moving in the opposite direction.


Out-of-the-Money

On the opposite end, a lower delta, say 0-5, is so far out of the money (or so far away from the stock price), that it will not move with the stock, unless the stock has made a huge move in the direction of that strike.


Out-of-the-money options have deltas lower than 50.


At-the-Money

An at-the-money option has a delta of 50, the call being +50 and the put being -50.


Pure & Simple


Now, remember our synthetics


We can create the stock using calls and puts of the same strike. (Each call and put delta of the same strike totals 100.)


Call deltas are positive, moving in the same direction as the stock … Put deltas are negative, moving in the opposite direction of the stock.


The delta tells us how the price of that option “should” move with the movement of the stock.


If the call delta is 35, the put delta is -65.


If stock moves up $1, the call “should” move up $.35 and the put “should” move down $.65.


Enter Vol


I use the word  “should” because that is the exercise in its purest form — but it doesn’t account for old friend volatility.


Yes, volatility is that one factor that is not a constant in the pricing of options — it is always moving.


The volatility of the underlying is priced into the options prices, and as an underlying’s volatility increases, so will the extra premium priced into the options.


In general, the volatility of a stock tends to go down on the upside (when a stock is trading higher) and goes up when a stock trades lower.


In this new world of “you only live once” (YOLO) trading, though, we are seeing volatility go up as these stocks skyrocket, as it should.


That’s why it pays to remember … delta is very useful for hedging.


Say you buy 100 40 delta calls, making you 4000 deltas long. This means if the stock moves a dollar lower, you will lose $4,000.


How do you hedge this position? You can sell 4000 shares of stock, sell 4000 deltas of another call or buy 4000 deltas of puts.


This is the magic of options and there is so much more! 


More Greeks, too!


Stick with me and I’ll teach you …


Meanwhile, I have a whole year of college applications ahead =/


Thanks for Reading … See You Next Tuesday!


Licia Leslie

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