How To Use “Delta” In Options Trading Like A Pro

   

I want to talk about how to use Delta in options trading like a pro. Many people find these Greeks like Delta to be one of the more confusing concepts when learning about options. As you will see in just a moment it’s important to understand Delta if you want to make successful trades.

In this article, I will explain Delta in detail and show exactly how to use it to your advantage in options trading. What we’ll talk about specifically is what is Delta, we’ll talk about understanding Delta, and we’ll talk about the probability ITM feature.

Then I’ll show you how I use Delta to apply it to decision making specifically when trading options with each of the two strategies I trade, The PowerX Strategy and The Wheel Strategy. We’ll take a look at many examples here of how Delta works.

What Is Delta In Options Trading?

Let’s first talk about what is the Delta? Delta is the fourth letter in the Greek alphabet. The Delta value ranges for calls from 0-1 and measures how much the price of an option changes if the stock changes by $1. I’ll explain how this applies to call options and put options.

For a call option, if we have a delta value of 0.6 for an option, it means that the option goes up or down 60 cents for each dollar that the underlying moves. And the underlying asset can be a stock, an ETF, etc.

Now for puts, this is where the Delta goes from -1 to 0. It’s the same. How much does the price of an option rise and fall, if the underlying asset moves by one dollar. With a Delta of 1, it means that the price of the option moves $1 for each dollar that the underlying asset moves.

Delta Example For Call Options

Delta in Options Trading

We can use any given stock as an example so let’s take a look at an options chain for Apple (AAPL). At the time of this writing, Apple is trading at $174.26. On the left-hand side, we have calls, on the right-hand side, we have puts.

Delta in Options Trading

Now let’s say that we are buying call options that are at the money, so at 175. Now you see that the Delta for the 175 is 0.468. This means for every dollar that Apple moves, the price of this option moves around 47 cents.

So right now, the last traded price we have is 79 cents. If Apple would move from $174.12 to $175.12, we can expect this option to move up by 47 cents to around $1.26.

Delta Example For Puts

Delta in Options Trading

For puts it’s the same way. If you are looking at the 175 put, there is a Delta of negative 0.352. So this means that if Apple moves down by a dollar, it means the option will increase in price, from right now $1.88, by 53 cents.

The Probability ITM Feature.

All of this is cool and handy, but you might wonder why you need this. Why does this really matter? There’s another use of Delta that many traders may not know about. This is the probability ITM feature.

Not only does Delta tell you how much the price of an option will change when the stock price moves by one dollar, but it also tells you the probability of that option being in the money.

Before we continue, this article is a part of our Options 101 For Beginner Series. This is a series of FREE on-demand video courses where you will learn the building blocks of options trading, the core concepts, how to avoid crushing mistakes, and much, much more. You can check out this free course HERE.

Here’s An Example

Let’s say that you are bullish on Apple. Is it possible for Apple to move up to 185? What is the probability that Apple moves to up to $185?

Options have certain expiration dates. Let’s take a look at the expiration date for next week. Now we want to see what the Delta is of the 185 call option. The Delta of the 185 call option for next week is 0.061.

This means that the probability that Apple will move up there, and that this option is in the money meaning that Apple moves above $185, is 6.1 percent.

Delta in Options Trading

Now let’s see what the probability is if we give Apple two weeks. We will go to next week’s expiration and look at the 185, and we see the probability that Delta went up to 13.9 percent.

This means that there’s a 14 percent probability that within two weeks, Apple is moving above $185. Let’s also take a look at the other extreme here.

Let’s say we want to know how likely is it for Apple to move below $155 within the next two weeks. This is where you see the probabilities here.

We are looking at 155, and now we need to take a look at the put. Looking at the Delta, the probability is 0.44. This means that the probability of Apple moving below $155 in two weeks is only 4.4 percent.

Delta Changes Everyday

Keep in mind that this Delta changes all of the time. As the stock moves, you will see it on your option chain, this Delta changes every few minutes. It really depends on your broker. Some brokers calculate it in real-time. Most brokers calculate it every few minutes, which is absolutely fine.

Delta in Options Trading

But this way, you have a probability of how likely is it for Apple to go up or down. To move above $185 in two weeks, it was around 14 percent, and to go below $155 was 4.4 percent.

So this means the probability of Apple being in this range for the next two weeks, as of today, is 80 percent.

I think that this is very cool and very few traders know about this.

How Do You Use This In Your Decision Making?

Let’s just keep it simple. The idea is when you are buying options you want the option to end up in the money. Otherwise, it expires worthless.

On the other hand, when selling options and you’re collecting premium, then you want the option not to end up in the money. Because this way it will just expire worthless, and you keep the premium. This is how I like to use it.

When buying options, I like to see the Delta at, at least 0.45-0.5. This is when I’m using The PowerX Strategy.

Using Delta With The PowerX Strategy

Let me show you a very specific trade that I did yesterday using one of the two strategies I trade, The PowerX Strategy. This trade was for IRM, Iron Mountain.

Delta in Options Trading

I entered at 46.35. My first profit target is set at 51.21, and my second profit target is set at 53.64. I have a stop loss at 43.92. As you can see, the stock is just slightly down, but we are still trading around our entry price.

Now instead of buying the stock outright, you could actually buy an option, and this is what we are looking at.

Delta in Options Trading

At The Money vs In The Money

For the quick trades we have two possibilities. We can trade an At The Money option or an In The Money option.

Delta in Options Trading

Now, if you have PowerX Optimizer, you might have seen this little “Show Options Greeks” button here.

And this little link shows you the Delta of these two options. This means if you are buying five At The Money options, that with every dollar that the stock moves higher, the option is moving higher by 41 cents, approximately.

And this is how we can calculate how much the option will be worth when the stock hits the profit target, or when the stock hits the stop loss.

We also have another possibility of buying the ITM option price, and here it has a Delta of 61 percent. So for every dollar that the stock moves higher, the option makes 61 percent. How likely is it that the stock will stay above 45? Well, that is a 61 percent probability as of today.

So this is why when buying options, we want to use the Delta of around 0.45-0.5. Sometimes I’m willing to go as low as 0.4. On the other hand, let’s talk about how to use this when trading The Wheel.

Using Delta With The Options Trading Wheel Strategy

Now let me share with you how I use Delta with The Wheel Strategy, the second of the two strategies I trade with.

So the Delta, when selling options, is where you want to go for a low Delta. The idea is that you have a low probability of this option being in the money because this means that now you would have to buy the stock.

What Should You Look For?

This is where it makes sense to look for something that is 0.2 or less. This means a 20 percent probability of being in the money, which, on the other hand, obviously means an 80 percent probability of expiring worthless. This is what we look for when trading The Wheel Strategy.

Let’s use Dick’s Sporting Goods as an example. The PowerX Optimizer suggests us a strike price of 104. Not ideal, this is why I didn’t flag it as green and flagged it as “possible.” I would like to see a strike price of closer to 100.

So if we would sell this today, and it has an expiration of February 11 at the time of this writing, that is eight days. This means that in order to get In The Money, this stock could drop another 7 percent.

But here’s what’s more important. This is where we look at the Delta. The Delta is 0.13. What does it mean? It means that the probability, as of today, that DKS will close below 104 in the next two weeks is only 13 percent. So this means that you have an 87 percent probability of this option expiring worthless.

Keep in mind this is subject to change every single day. So as the stock price gets closer to the strike price, the probability might be higher. But it’s one of the things that some people like to keep an eye on when trading options. This is why understanding Delta in options trading is so important.

Using Delta To Consider Rolling When Trading Options

This is where some people use Delta to determine when they should roll. If you want to avoid assignment, and you want to roll an option, this is where you could look at Delta.

You could, for example, if the Delta is bigger than 0.3, consider rolling an option to avoid assignment. And if the Delta is still below 0.3, you don’t do anything.

Summary

Delta isn’t just a letter in the Greek alphabet. The key takeaway that Delta helps you with is how the option’s price moves with the stock.

Delta in options trading is really, really fascinating if you know what it means. And most people just know that Delta is telling you the price change. The price change is based on how much an option moves for each dollar that the stock moves.

I think this probability ITM feature is very cool when it comes to Delta in options trading. Maybe you have known it, maybe you did not know this. If you didn’t know this and you think that others should know about it, feel free to share this.

If you would like to learn more about the two strategies that I trade, I suggest picking up a copy of my books. You can grab a copy of The PowerX Strategy HERE, and a copy of The Wheel Strategy HERE.

I also have two videos for you. One of them is explaining the “PowerX Strategy.“ The other one is explaining “The Wheel Strategy” in detail.

Read Next: Best Trading Software For Options Trading: Especially The Wheel



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