wow, you explain things so well !!! well done ! I didn't watch all videos about delta of course, but a lottttt, to me this is THE best and most clear explanation !!
Really good video. Took me more than an hour and rewinding many times to understand the concept and replicate it in ToS. It would be super helpful if tastytrade would included screen sharing from ToS to explain these concepts in these videos.
Very interesting video. BUT, if you have 200 shares and sell 4 calls that does not seem to me to be directional neutral, because if the share price is down at expiry then you keep the call premiums (but you may be losing on the share price). However, the share price may gap up and be well ITM at expiration -then you have to buy 200 shares and could lose lots of money.
these videos for the most part are great info. However, maybe need to SLOW DOWN or NOT put so much info into a 1-3 minute segment so us Novice/Rookies that are 100% new to TOS can try and understand what you are talking about. Also (my MAIN reason for watching these) You need to in depth with Examples (scenario walk through) the Functions. Your only hitting a brief glimpse at each tab does Not teach its' function/uses! So if you could maybe add terminology or example of using said tabs in LAYMAN and SLOW English for the Novice/Rookies like myself that almost know how to use a computer would be most helpful. Any suggestions? Dave
Thanks for your feedback! I recommend checking out Brittany's "Where Do I Start" series, where she is currently learning about options from the very beginning - I think you'll find it helpful: www.tastytrade.com/tt/shows/wdis-options-101
The best part is that these are free and you can go back and watch them over and over again until it makes more sense to you or you can change the playback speed to .75 speed and that should also be helpful. I do not recommend it at.5 speed
For options, Does the delta move per dollar act like this👉🏻 If you have an .80 delta and the stock moved up a dollar, is it .80x100=$80 gain? Does it work like that?...
Assuming no change in theta or vega, yes that would be the case. The problem is that theta and vega are constantly changing as well, so it's rarely perfect.
but if you want to earn daily as per trade write the call option and sell out of the money strike with delta callculation .10 we considered in india on the friday is .10 to thursday is .01 end of the expiry day
At the end of the video you mentioned rates of change. Is that to say that delta is the first derivative of the underlying's price and gamma is the second?
Thank you very much for the video, but can you please provide some examples on the hedging part, where we have 2 cases of selling call options, and the price increased to a dollar?
In the case of owning 100 shares (+100 delta), we can sell an OTM call to create a hedge against that. If we sell a -30 delta call, we still have upside profit potential, but our delta is reduced to +70. That way if there is a selloff or if the stock trades sideways, we would be better off than if we didn't sell the call. This in exchange for capping our unlimited upside profit potential for the duration of the call contract. Just an example but I hope this helps!
is it really possible to collect the premium of short call, if you hedge with buying delta numbers of shares and taking a loan. It seems you have invested in such a strategy. Theoretically, i have read, that the cost of dynamic hedge of short call and preiumm are equal. But it is good, to hear what exactly is the point of full delta hedge by short call, because I dont see where is the profit, if one finance the shares by a loan. How exactly does delta hedge in practice be applied profitably? Thank you for the answer
I have a three part hypothetical question. (Part 1) Lets say I bought a Hertz Put contract for the $1 strike price expiring on 7/2 (2 days from now) for a premium price of $0.01. This contract has a Delta of -0.0616. What this means is that if the current stock price of Hertz, which is at $1.43, drops to $0.43, I would make an unrealized profit of $6.16. Is this correct?
(Part 2) Let’s say I own 100 shares of Hertz and the price of the stock stays at $0.43 thru the expiration of the contract. If I choose to exercise this $1 strike price contract when it expire, Wouldn’t that mean that I would make a profit of $56?? (100 shares @ strike price of $1) - (100 shares @ example current price of $0.43) - (premium for 1 contract ($1)) = $56.00
(Part 3) My confusion is this, Why is the Delta driven unrealized profit from Part1 so different from the exercised profit from Part2 when the price of the stock was at $0.43 for both scenarios?
You would make more than that, because the gamma is so high and that move would be a 70% reduction in the stock price, so your strike would be 57 cents ITM. Your option would be worth $57 real dollars at least, plus any extrinsic value remaining. This is a tough example because a $1 move is a massive portion of the actual stock price itself. Here's a segment on the greeks we did yesterday that should help:www.tastytrade.com/tt/shows/market-mindset/episodes/options-greeks-101-06-30-2020
Your share example is not really practical - I'm assuming you'd own shares at $1.43, and then the stock drops to $0.43. You'd lose $100 on the shares, but your risk would be offset by the gain in the put contract of $0.57c Your loss would be cut in half if you sold out of the put, and your cost basis would be lowered on the shares. If the stock then rallied back to $1.43, you'd make back $100 on the shares, and you'd still have that profit locked in with the put that no longer exists. Hopefully this helps!
tastytrade I see. So the proportion of the move compared to the actual stock price plays a significant role in the movement of the option premium. That’s what I was missing. This clarifies a lot. Thank you for your help on this.
Regarding the hedging example that you used, if I am long 200 deltas due to being long 200 shares of stock and I sell 4 ATM .50 delta call options making me delta neutral, the price moves against my position and I'm called away on all 4 now ITM options, does that mean I've basically given myself a hedgy? Wouldn't I be forced to produce 200 more shares of stock?
Yes - although it would initially be a perfect hedge, eventually if the calls move ITM it will become an over hedge and you would be short 200 shares of stock.
@@tastyliveshow So what do you do in that situation day by day. you eventually close out the the extra two contracts so you dont get caught with unlimited risk as if they move ITM? I totally understand the concept of delta neutral trading in the terms you explained it. but i dont understand how you can label it a full hedge (as if you were protected) if you could get called away on an additional 200 shares at a later date
Thanks! Delta would decrease the value of the option if the stock moves in the opposite direction. For example, if I buy a call that has a 50 delta, if that stock drops $1.00, I should lose around $0.50 all else equal.
If someone has a negative delta of (0.50) and the underlying goes up $1.00, which would be bad for that person, they would lose $0.50. If we have negative delta we want the underlying to go down, similar to how if we have positive delta we want the underlying to go up.
Hi Mike, your explanation is very clear and have great knowledge in your videos, its an amazing financial job. By the way what is the app or software you use to do the whiteboard ? Need to teach some ppl music theory on my church but some ppl come from so far away and this is a good help. Thanks in advance!
Think of a covered call - you own 100 shares of stock, and you sell a call against it to reduce the cost basis. The short call has a negative delta, and the long shares have a positive 100 delta. With the covered call, your overall delta is now less than 100, becuase the short call carries some sort of negative delta, which hedges your directional risk.
Depends on your goal - if your goal is to have a high potential return with a low probability of success, then multiple OTM options at 10 delta would yield the highest gamma exposure if you're correct. If your goal is to have a lower potential return but a higher probability of success than the example above, buying one 50 delta option would be better. Still, buying options and holding to expiration is a negative expected value endeavor in the long run, so I'd just have strict rules if you're going about this - totally up to you though!
We sell spreads ATM or OTM, so the short option would be at 50 delta or lower. Aside from that, it's all about risk:reward and the trade-off between probability of success. We shoot for collecting 1/3rd the width of the spread, which typically gives us around 70% POP.
Mike can you help? What will be delta of future contract for different months. Will it be 1 for all 3 months or will it differ? As the contract goes far months..
All deltas will be different with futures, just like different expirations with a stock price. When expected move and IV% is different, deltas are different.
They mirror each other - they'll just be opposite. If a short put has a positive 30 delta, the counterparty's long put will have a negative 30 delta. If a long call has a positive 60 delta, the counterparty's short call will have a negative 60 delta.
In a margin account, you can sell naked calls, it just requires additional buying power. If I own 100 shares, I can sell one call against those shares and it will not require any additional buying power. If I sold another one though, it would, because that 2nd call wouldn't be covered by my shares.
I dont get the increase or decrease of an underlying If stock increases by $1, & delta is 0.20,then option price increases by $0.20 If stock decreases by $1 & delta is 0.20, then option price increases by 0.20? Is this wrong (the 2nd part im guessing) Thanks
For the 2nd line, the option price would decrease by $0.20. The option price would only increase by $0.20 if the delta was -0.20 and the stock decreased $1.
Yes it does - the more time there is until expiration, the higher delta an out of the money option will have, because there will be a higher chance of that option moving in the money. Also, charm is a metric that measures the decay of an option's delta given the passage of one day, all else equal.
Cool, gotcha. But what about the in-the-money options, I don't get that. The option price reflects the price of the option, so if you include that with the strike, it's never in the money, I'm guessing you just mean the share price is above the strike? Thanks fir your help!
Some things in life are meant to be unknown lol. Btw thanks for these videos made a massive difference in my fundamental knowledge. Iam a chemist but this stuff comes very naturally with the way you explain it. Keep up the good work!
Dude. I understand GREEKS. You really make it complicated and confusing. I feel for the guy who knows nothing about DELTA, and watches this video. I know your intentiions are good, but K.I.S.S
I vow to watch this as many times it takes to understand it fully
wow, you explain things so well !!! well done ! I didn't watch all videos about delta of course, but a lottttt, to me this is THE best and most clear explanation !!
best explanation.... review a number of videos; and finally after a few minutes understand it fully......
took me a little while to understand the concepts you talked about halfway through the video, but I got it, thanks for the explanation!
Really good video. Took me more than an hour and rewinding many times to understand the concept and replicate it in ToS. It would be super helpful if tastytrade would included screen sharing from ToS to explain these concepts in these videos.
Very interesting video. BUT, if you have 200 shares and sell 4 calls that does not seem to me to be directional neutral, because if the share price is down at expiry then you keep the call premiums (but you may be losing on the share price). However, the share price may gap up and be well ITM at expiration -then you have to buy 200 shares and could lose lots of money.
Very nice presentation
Thanks Mike , VERY useful !
Great explain
🇮🇳 Love from India
Very well explained. Thank you!
Excellent vid. Thank you. 💪🏾
mike and his whiteboard where were you when I was in school lol
Probably skateboarding / snowboarding somewhere! =)
Love this video thanks everyone
Great explanation and breakdown as usual. Looking forward to catching up on your latest uploads.
Excellent explanation, thanks!!
Thanks Mike
Very helpful vid, thank you
why 'bring it on home'? one of my all time fav tunes btw, nice choice
these videos for the most part are great info. However, maybe need to SLOW DOWN or NOT put so much info into a 1-3 minute segment so us Novice/Rookies that are 100% new to TOS can try and understand what you are talking about. Also (my MAIN reason for watching these) You need to in depth with Examples (scenario walk through) the Functions. Your only hitting a brief glimpse at each tab does Not teach its' function/uses! So if you could maybe add terminology or example of using said tabs in LAYMAN and SLOW English for the Novice/Rookies like myself that almost know how to use a computer would be most helpful. Any suggestions?
Dave
Thanks for your feedback!
I recommend checking out Brittany's "Where Do I Start" series, where she is currently learning about options from the very beginning - I think you'll find it helpful:
www.tastytrade.com/tt/shows/wdis-options-101
The best part is that these are free and you can go back and watch them over and over again until it makes more sense to you or you can change the playback speed to .75 speed and that should also be helpful. I do not recommend it at.5 speed
Nice information
For options, Does the delta move per dollar act like this👉🏻 If you have an .80 delta and the stock moved up a dollar, is it .80x100=$80 gain?
Does it work like that?...
Assuming no change in theta or vega, yes that would be the case. The problem is that theta and vega are constantly changing as well, so it's rarely perfect.
For bullish market, which one for trader to buy a call stock option either ITM, ATM ad OTM?
you are the man.
Great as usual, thanks a lot!
If I am buying ITM naked call. What Delta will be good for me? One that cover the cost with 1 point movement in underlying?
but if you want to earn daily as per trade
write the call option and sell out of the money strike with delta callculation
.10 we considered in india on the friday is .10 to thursday is .01 end of the expiry day
At the end of the video you mentioned rates of change. Is that to say that delta is the first derivative of the underlying's price and gamma is the second?
Correct! gamma is the rate of change of delta given a $1 stock move, delta is the rate of change of the option price given a $1 stock move.
Thank you very much for the video, but can you please provide some examples on the hedging part, where we have 2 cases of selling call options, and the price increased to a dollar?
In the case of owning 100 shares (+100 delta), we can sell an OTM call to create a hedge against that. If we sell a -30 delta call, we still have upside profit potential, but our delta is reduced to +70. That way if there is a selloff or if the stock trades sideways, we would be better off than if we didn't sell the call. This in exchange for capping our unlimited upside profit potential for the duration of the call contract. Just an example but I hope this helps!
well explained!
is it really possible to collect the premium of short call, if you hedge with buying delta numbers of shares and taking a loan. It seems you have invested in such a strategy. Theoretically, i have read, that the cost of dynamic hedge of short call and preiumm are equal. But it is good, to hear what exactly is the point of full delta hedge by short call, because I dont see where is the profit, if one finance the shares by a loan. How exactly does delta hedge in practice be applied profitably? Thank you for the answer
I have a three part hypothetical question.
(Part 1) Lets say I bought a Hertz Put contract for the $1 strike price expiring on 7/2 (2 days from now) for a premium price of $0.01. This contract has a Delta of -0.0616. What this means is that if the current stock price of Hertz, which is at $1.43, drops to $0.43, I would make an unrealized profit of $6.16. Is this correct?
(Part 2) Let’s say I own 100 shares of Hertz and the price of the stock stays at $0.43 thru the expiration of the contract. If I choose to exercise this $1 strike price contract when it expire, Wouldn’t that mean that I would make a profit of $56?? (100 shares @ strike price of $1) - (100 shares @ example current price of $0.43) - (premium for 1 contract ($1)) = $56.00
(Part 3) My confusion is this, Why is the Delta driven unrealized profit from Part1 so different from the exercised profit from Part2 when the price of the stock was at $0.43 for both scenarios?
You would make more than that, because the gamma is so high and that move would be a 70% reduction in the stock price, so your strike would be 57 cents ITM. Your option would be worth $57 real dollars at least, plus any extrinsic value remaining. This is a tough example because a $1 move is a massive portion of the actual stock price itself. Here's a segment on the greeks we did yesterday that should help:www.tastytrade.com/tt/shows/market-mindset/episodes/options-greeks-101-06-30-2020
Your share example is not really practical - I'm assuming you'd own shares at $1.43, and then the stock drops to $0.43. You'd lose $100 on the shares, but your risk would be offset by the gain in the put contract of $0.57c Your loss would be cut in half if you sold out of the put, and your cost basis would be lowered on the shares. If the stock then rallied back to $1.43, you'd make back $100 on the shares, and you'd still have that profit locked in with the put that no longer exists. Hopefully this helps!
tastytrade I see. So the proportion of the move compared to the actual stock price plays a significant role in the movement of the option premium. That’s what I was missing. This clarifies a lot. Thank you for your help on this.
For the option price to increase, does the option contract necessarily have to be ITM, or can the extrinsic value increase, regardless of moneyness?
Regarding the hedging example that you used, if I am long 200 deltas due to being long 200 shares of stock and I sell 4 ATM .50 delta call options making me delta neutral, the price moves against my position and I'm called away on all 4 now ITM options, does that mean I've basically given myself a hedgy? Wouldn't I be forced to produce 200 more shares of stock?
Yes - although it would initially be a perfect hedge, eventually if the calls move ITM it will become an over hedge and you would be short 200 shares of stock.
Follow up question on that, can you also do 6 or 7 of those OTM -30 Delta Calls as well to get closer to neutral instead of 4 ATM calls?
@@tastyliveshow So what do you do in that situation day by day. you eventually close out the the extra two contracts so you dont get caught with unlimited risk as if they move ITM? I totally understand the concept of delta neutral trading in the terms you explained it. but i dont understand how you can label it a full hedge (as if you were protected) if you could get called away on an additional 200 shares at a later date
I love your videos man , the question about delta that I have is , in what cases would delta decrease the value of the options ?
Thanks! Delta would decrease the value of the option if the stock moves in the opposite direction. For example, if I buy a call that has a 50 delta, if that stock drops $1.00, I should lose around $0.50 all else equal.
Hi Mike .can please illustrate more about how i am gonna loss money if i have negative delta and the price of underlying is going up?
If someone has a negative delta of (0.50) and the underlying goes up $1.00, which would be bad for that person, they would lose $0.50. If we have negative delta we want the underlying to go down, similar to how if we have positive delta we want the underlying to go up.
Hi Mike, your explanation is very clear and have great knowledge in your videos, its an amazing financial job. By the way what is the app or software you use to do the whiteboard ? Need to teach some ppl music theory on my church but some ppl come from so far away and this is a good help. Thanks in advance!
Thanks! Glad you like it!
These were animations portrayed using expressions and a tricaster using a green screen. Mostly Adobe products!
Is there any way you can make video less blury? Or do I need to adjust my settings? Great content. Thanks.
If the video is blurry it would be on your end - I would try resetting your internet router or clearing your browser cache.
Im super lost on the Hedging section of this video ): help please
Think of a covered call - you own 100 shares of stock, and you sell a call against it to reduce the cost basis. The short call has a negative delta, and the long shares have a positive 100 delta. With the covered call, your overall delta is now less than 100, becuase the short call carries some sort of negative delta, which hedges your directional risk.
is it better to buy 1 ITM options with a delta of 0.50 or buying multilpe OTM options with a delta of .10
Depends on your goal - if your goal is to have a high potential return with a low probability of success, then multiple OTM options at 10 delta would yield the highest gamma exposure if you're correct. If your goal is to have a lower potential return but a higher probability of success than the example above, buying one 50 delta option would be better. Still, buying options and holding to expiration is a negative expected value endeavor in the long run, so I'd just have strict rules if you're going about this - totally up to you though!
@@tastyliveshow ok thank you
So what would be an ideal delta for selling vertical put spreads?
We sell spreads ATM or OTM, so the short option would be at 50 delta or lower. Aside from that, it's all about risk:reward and the trade-off between probability of success. We shoot for collecting 1/3rd the width of the spread, which typically gives us around 70% POP.
tastytrade does this 1/3 apply for iron condors too?
Mike can you help? What will be delta of future contract for different months. Will it be 1 for all 3 months or will it differ? As the contract goes far months..
All deltas will be different with futures, just like different expirations with a stock price. When expected move and IV% is different, deltas are different.
@@tastyliveshow Thanks Mike Awesome
shoot...felt so stupid lol
will have to watch this maybe 5 times hahah
Will the delta be different based wether selling or buying contracts or do they mirror each other?
They mirror each other - they'll just be opposite.
If a short put has a positive 30 delta, the counterparty's long put will have a negative 30 delta.
If a long call has a positive 60 delta, the counterparty's short call will have a negative 60 delta.
If you have 200 shares and you sell 4 atm calls which control 400 stocks, how can that happen? How do u get that extra 200 to sell?
In a margin account, you can sell naked calls, it just requires additional buying power. If I own 100 shares, I can sell one call against those shares and it will not require any additional buying power. If I sold another one though, it would, because that 2nd call wouldn't be covered by my shares.
I dont get the increase or decrease of an underlying
If stock increases by $1, & delta is 0.20,then option price increases by $0.20
If stock decreases by $1 & delta is 0.20, then option price increases by 0.20?
Is this wrong (the 2nd part im guessing)
Thanks
For the 2nd line, the option price would decrease by $0.20.
The option price would only increase by $0.20 if the delta was -0.20 and the stock decreased $1.
@@tastyliveshow thanks.
Need to remember the direction & more itm you go, more expensive the option will be.
I recently spot delta at .00 on Friday but it was still early in the day around 11am. Anyone know why that is?
If the strike was far OTM and had $0.00 bid then it's ultimately worthless. That could change though if the stock rapidly moved towards the strike.
the word " sensitivity " is much better than " traction "
what does neutral delta mean?
It means that you have a neutral range of profitability - you don't need the stock to move for your trade to be successful.
slow down the pace bro
Does time value affect delta?
Yes it does - the more time there is until expiration, the higher delta an out of the money option will have, because there will be a higher chance of that option moving in the money.
Also, charm is a metric that measures the decay of an option's delta given the passage of one day, all else equal.
Cool, gotcha. But what about the in-the-money options, I don't get that. The option price reflects the price of the option, so if you include that with the strike, it's never in the money, I'm guessing you just mean the share price is above the strike? Thanks fir your help!
the important thing is whos guitar riff is this
I'd like to know that, too.
Bring it on Home / Led Zeppelin
Tastytrade's got some amazing music
You mean Mike and his Green Screen.
haha you may or may not be right!
Some things in life are meant to be unknown lol. Btw thanks for these videos made a massive difference in my fundamental knowledge. Iam a chemist but this stuff comes very naturally with the way you explain it. Keep up the good work!
Mike my white boy.
Dude. I understand GREEKS. You really make it complicated and confusing. I feel for the guy who knows nothing about DELTA, and watches this video. I know your intentiions are good, but K.I.S.S