Invest and Trade Profitably with Jon Johnson

You always point out the delta when buying an option. Is it better to have a high delta or a low one?

August 30, 2000

An option delta measures approximately the change in the option pricefor every $1 change in the underlying stock price. For example, if a calloption has a delta of 50 (it can also be shown as 0.50), for every $1 theunderlying stock moves up or down, the option will move, all other thingsequal, 50 cents. A put option delta is designated as a negative; if thestock moves up it moves down and vice versa. Typically the deeper in themoney and the closer to expiration, the higher the delta.

As the delta represents the percentage the option will move in relation tothe stock, the higher the delta the better the move. We prefer higherdeltas for various reasons. One of the primary reasons is that the optionwill move better when the stock moves and that makes us a better profit onthe play. Getting a higher delta, however, has to be balanced with thecost of getting that delta. If the cost is high the precentage gain maybe less even though the higher delta option generally increases in valuemore rapidly.

We always look at the available options to see if it is a better value tobuy 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 calloption) 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 bestreturn. As a general rule we like a higher delta, but we always then runthe numbers to see what the anticipated profit will be given theanticipated move in the stock.

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