The Wizetrade Options Blog

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I received an email the other day pertaining to my previous Blog on using OTM options within the DEPOT.  I thought they were exellent questions so I thought I would list them for you all.

If you have not read the blog i would encourage you to do so before you read on.

 

I would like to actively trade AAPL and would prefer using @ a 90 delta since this is a quick 'in & out' play and I want to maximize it quickly. Therefore, using your method, I should try and find a delta around 40-45 and by twice the amount of contracts which I can afford. The aapl 90 delta calls were around $20/contract, but the 45 deltas were $5.

 

QUESTION:

1.      What are the pro's and cons using this method? – Pro – It’s cheaper.  Con – if the trade goes against you it will take longer to make up your loss.

2.  Do you use it on all trades? – No – It just depends on the price of the higher delta option.

3.  What do you do if you want a 'equivailant to a 90 delta' (using 45 delta), BUT the only deltas availabe are 30 and 50 deltas?  I would take the .50.

4.  If I buy a 55 delta and double the contracts, that would give me the equivalance of a 110 delta. What happens when the two deltas EXCEED 100?  Stock always trades at “Par.”  If you were using options as insurance policies (as they were originally intended) and you purchased a .90 delta put to protect your one hundred shares of stock you would essentially be protecting 90% of the value of the stock.  If you purchase two .55 delta put contacts to insure the same stock you would be insuring it for 110% of the value – that does not make sense.  If you are trading options, and not using them for protection, you are really insuring something that you don’t own.  So if you have two .55 delta put contracts you are actually getting 10% more return than you would if you were trading 100 shares of  the stock.

 

Hope this helps.

I have been an In the Money option guy for years but recently I started looking at Out of the Money options in a different way.  Lets say I was going to do a crazy thing and trade MA to the downside.  That would require that I buy a Put option.  If i were to follow the DEPOT method I would be looking for an option with a Delta somewhere between -.70 and -.85.  This is typically known as the sweet spot.  As I write this blog, one potential option is the MALMW (Jan 260 Put) for $16.60 X $17.00.  The option has a delta of -.72 which works out nicely.  The only problem is that the spread is $.40.  This is a touch too high.  Of course you could shave the spread to $.30 but that may even be a touch too high.  But what if I took a look at the MALMU (Jan 240 Put) 5.50 X 5.60.  This option is OTM since MA is currently trading for $245.80.  You might say "I can't trade that, the delta is not between -.70 and -.85, that would be breaking the rules."  I appreciate your discipline, but what if you bought two of these options.  By doubling the number of contracts you are purchasing, you are essentially doubling the delta strength.  For example, if I purchased one contract of the option with a -.72 delta I would expect that for every $1.00 the MA stock dropped, my put option would increase in value by $.72.  If I chose instead to purchase two contracts of the -.32 delta option, I would expect to make $.72 for every $1.00 MA drops.  It is the same.  Here is the cool thing, If I purchase two contacts of the -.32 delta option is will cost me a total of $11.20 if my numbers are correct.  That means I will be saving $5.80 per contact.  and the spread when added together will be $.20 instead of $.40.  It does not always work out that nicely but it may be worth doing some comparison shopping when you are hunting for options.