Are they of any use? I tend to use delta as a probability of something being in the money at expiration -- imperfect, I know, but useful as a back of the envelope thing. But with LEAPS, the deltas don't seem to change, even though the days remaining until expiration do. For example, a one week call ATM for UVXY is around .50. Go out 16 months, and it's the same delta, almost. Now, maybe it's UVXY, which decays and tracks futures on a mean-reverting index, the VIX, that's the problem here, as it is extremely unlikely UVXY will still be trading in the same place in 16 months as it does today. So, Maybe I should ask I do I get a delta for a UVXY LEAPS and whether it is relevant to anything. Or maybe my question applies to LEAPS on all stocks.
Well, you say the deltas aren’t different between two atm options. You didn’t comment on the other Greek risks.
You can’t look at just delta without looking at gamma. You can’t look at gamma without looking at theta. You can’t look at gamma and theta without looking at Vega.
Greeks are simply your exposures to certain changes in the world. Delta -> your exposure to the change in the underlying price Vega -> your exposure to the change in expected movement Theta -> your exposure to the change in time Gamma -> your exposure to the speed of movements in the underlying You can also think of theta as the compensation/rent for selling/buying gamma. Different options will have different exposures. Lets take a look at the greeks for the 1 month UVXY vs the 1 year UVXY delta 50 call options. Below is the graph for delta and gamma of the options. You can see that the delta 50 strike is very different across expirations! Which is a counter to your original observation. The 50 delta strike for Sept is $27 and the 50 delta strike for June22 is $75. The reason this is the case is best explained through an example using AAPL. We will look at the extreme - Imagine AAPL had a future volatility of 100% and you were asked to bet on the range of AAPL stock price over the next 10 years... what would your range be? Well AAPL is trading at $145 and we know it cant go below 0. But it could go to 1k or 2k maybe 5k! So we now have a future distribution that looks like the below. Where AAPL could trade anywhere inside that blue range over the next 10 years. Notice there is much more room to the upside but we are bound by 0 on the downside. That is why you will see delta above spot on very volatile stocks or options that have a long duration. If uvxy were to move up $1. The $75 June22 strike would move up .50 and Sept $27 would also move up .50 all else held equal. BUT what about if UVXY moved up $2? Well we know that both options made .50 when UVXY moved from from $26 to $27. What happens when UVXY moves from $27 to $28? That is where gamma comes in. The delta has now changed. Sept $27 strike is now .55 delta and the LEAP $75 June is still .50. This is because these options are a lot less sensitive to gamma (quick movements in the underlying). This also means they are a lot less sensitive to theta (decay from a change in time). Instead the leap becomes super sensitive to Vega (change in expected movement). But here is where it gets really interesting... remember from the picture above we looked at a scenario where AAPL future vol was 100%? What if instead it was 0%? Well the chance of an OTM option expiring ITM are 0% so the delta becomes 0%. This is referred to the change in delta with respect to a change in vega. So you need to keep that in mind when you are trading OTM leaps - your delta exposure could change quickly if vols were to change. When you are trading the options its important to look at what exposures you have. What are you sensitive too? LEAPS will have extreme sensitivity to Vega and delta and very little sensitivity to theta/gamma. The greeks are very important for every option. After all, its the tool you use to get your desired exposure to the world. So make sure they are inline with your thesis!
Ok, thanks for your work on this, seriously, and apologies for my obtuseness. Now, maybe I'm missing something, but in the UVXY case I cited, my thesis is I am damn sure, probably 90 percent plus, that the current 25 call, with the current market price about the same, will be way out of the money in 16 months. My delta however on the 25 LEAPS is like 50, which is what I would expect on a short term option. So why no difference in 16 months, especially given the unusual characteristics of the underlying?
Correction: the delta is about 80 for that ATM UVXY LEAPS, which is insane, given the track rocrd of the underlying. In fact, all of the calls have ridicuoulsly high deltas. Any explanation?
You can use your own methodology to deduce an answer. But I'm no expert on VIX futures. VIX is very low right now. The probabilty of VIX spiking before Jan. '23 may be considered very high.
the Vol on this option is high, so as Vol gets very high OTM deltas will go up. I’m not familiar with borrow on UVXY, but I assume youre not including any and your forward is the same as spot? If you think the forward for uvxy is much lower than current spot then your delta will go lower too.