For years I have been telling traders to strive to purchase in-the-money options that have high Deltas, preferably 1, if possible. Recently, Bev, a friend and fellow trader, and I had a discussion about Deltas, and she explained that she understood it to be advantageous to have a high Delta, but not necessarily as high as 1. My goal has always been to achieve dollar option profit for every dollar stock profit.
Well, Bev gave me the particulars in a way that I could really understand, and I stand corrected.
So here are the details.
Let’s take two different strike prices for the same option.
Ford Underlying is $13.73 (at time of Buy)
1. The 1.0 Delta, premium is $5.80
When the stock moves to $14.73 (1 dollar gain),
the premium moves to $6.80 (1 dollar gain.)
If you divide 5.80 by 6.80, you get a 17% gain.
2. The .71 Delta premium is $1.16
When the stock moves to $14.73 (1 dollar gain)
the premium moves to $1.87 (1.16 plus .71 cents)
If you divide 1.16 by 1.87, you get a 62% gain.
The cheaper the premium, the lower the Delta, but out-of-the-money gets very risky (as far as winning), but the rewards get higher as the delta gets lower. You’d just have to luck out. I still suggest buying at-the-money or in-the-money by a two levels with Delta between .55 and .80. these will have likelier wins.
Now admittedly, the difference in this shared example seems out of proportion. .71 Delta with premium of $ 1.16 and 1. Delta with a premium of $5.80. Big span between $5.80 and $1.16 and little span between 1. and .71. But they’ve been used to illustrate the math involved. As you now look at the option chains, trying to determine which of the in-the-money options holds the best percentage, you now have the knowledge and skills to answer the question for yourself. I thank Bev for bringing this advantage to my attention, and I am happy to share it with you.