Always maximize delta if you are long?

Discussion in 'Options' started by turkeyneck, Feb 11, 2011.

  1. I'm talking about DITM with delta at 0.8-0.9. Other than more capital at risk, is there any downside to maximizing delta if you are long a basic option?
     
  2. heech

    heech

    Not sure what you're asking here. If you're just looking to maximize delta, why wouldn't you just buy the underlying...? What are you looking to do with the DITM option instead?
     
  3. Deep ITM can be illiquid. Other drawbacks can be wide spread and trading under parity.
     
  4. piezoe

    piezoe

    One use for DITM calls and puts, of course, is as pseudo long and short stock. For example you can't trade on margin in an IRA, but you could assume a leveraged long or short position by buying DITM calls or puts, with the trade-off that calls and puts expire, whereas long and short stock does not (usually that is :D). If I am going to short a stock I most often prefer to do it by buying puts deep in the money and far out if I can get them at a decent price. (I'm usually looking for delta around 0.8 in those cases.)
     
  5. Isn't it generally better to choose an option with a delta of 0.5 or around ? You then count on delta to increase with a favorable move. This gives you leverage and more protection in case of an unfavorable move.
     
  6. piezoe

    piezoe

    No, it isn't always better.
     
  7. So what rule of thumb do you guys follow to pick the "right" strike if you are long an option?
     
  8. you can go 100 delta going long the stock :D
     
  9. What's best depends on what the underlying does.

    Deep ITM call has low TP and will make something on smaller up moves (or lose very little) but will lose more if totally wrong and UL drops big time.

    OTM is all TP but provides leverage (a big move up is a lottery ticket). No move up is a wasting asset and a total loss at exp.

    ATM is sort of a hybrid of both.

    Timing and direction is everything.
    Dumb luck doesn't hurt either :)
     
  10. I like to trade 70-80 delta options for swing trades.
     
    #10     Feb 14, 2011