Probably a stupid question

Discussion in 'Options' started by candeo, Jan 30, 2007.

  1. candeo


    Delta tells you how much your option will move for each $1 move in the stock.
    Is there an indicator that tells you the % move of your option depending on the % of the stock?

    I know we could just divide delta by stock price etc..but I was wondering if there was an easy and fast way to get this information. It would be much more useful for risk management/position sizing than delta.
  2. candeo


    My broker is thinkorswim. Would be great if someone knows how to get this information with their software.
  3. candeo


    So, no one can help me with this? Seems like a % move would be more relevant than a $ move.
  4. Not really. A "% move" can create a variety of scenarios based on your overall position. Downmoves with stocks are more likely to have volatility expansion than upmoves. Short-dated options will have time decay that can magnify or minify your returns beyond price movement alone. Focusing on your account balance will give you quicker warning of a loser(s) than being concerned with equations that are based on false assumptions or that have missing components.
  5. candeo


    I don't think you understood my question. My goal is to be able to calculate my potential loss (depending on my stop) before I enter a trade and keep this potential loss the same for all trades.
    If I know that for example my stop is when I have a 2% loss in the stock, then if I know what it would be with my options I can decide how many contracts I am going to buy.
    The goal is to not lose more money on a stock that moves 1% against me than I am making on a stock that makes a 3% in my direction just because I did not pick the right option. Picking options depending on their beta works OK for stocks that are in the same price-range but not when you get more/less expensive stocks.
    If I had a number that would tell me how much I would make/lose with my option for a 1% move in the stock, then it would be much more efficient.

    Hope this makes sense.
  6. Gamma (and potentially even Vega) is too important a factor, and so the formula you're looking for is much more complicated.

    Let's say you're trading the S&P 500, and it moves up 5%. Volatility will almost certainly get crushed leaving you with a more profitable position than a simple delta computation wouldn't reveal. At the same time, a 5% down move will cause volatility to skyrocket, causing you to lose more money than delta would reveal.

    You should be computing your risk based upon gamma (and to a lessor extent, vega).
  7. MTE


    There's a lesser known greek, Lambda, which is exactly what you described, i.e. a % change in an option given a 1% change in the price of the underlying. It is not available in TOS, though, but you can use the "Analyze" tab to estimate your points, not as easy as looking at the option's Delta, but still works, plus you can incorporate other variables like time and volatility.
  8. Compared to the posters here, I know very little about the Greeks. What I can tell you is that your option's price (and its delta) is affected by multiple factors: passage of time, change in IV and stock price, distance from strike, etc. Trying to find a derivative indicator that is precise enough to take into account all variables is like trying to thread a needle. As suggested by nazzdack, focusing on your account balance (or the price of the option) will give you quicker warning of a loser(s). Focusing on the underlying might be an even better direction of your energy.

    Use the potential point move derived from your pct stock movement, multiply that by the delta and set your stops/alerts near that price. When you become a hedge fund, hire a quant to get you from within a nickel to within a penny :)
  9. candeo



    It was my understanding that Lambda was measuring the % move of the option for a 1% move in volatility. Am I wrong?
    I do use the "Analyze" tab for risk management as well. Great tool, but I wanted to find out if there was something faster.
  10. candeo


    "Use the potential point move derived from your pct stock movement, multiply that by the delta and set your stops/alerts near that price"

    Well, I understand this. But that won't give me my position size, so that for example a 2% loss in the stock would be a $1,000 loss in the option.
    This is what I am trying to do, not to decide where my stop will be.
    Looking at my portfolio is not going to help me BEFORE I enter the trade.
    What I want to avoid is lose more money than I want to, faster than I want to, especially compared to my winners. I want to decide what options to buy and how many of them, to make the risk the same on all my positions.
    If I buy 10 contracts of a GOOG option with a delta of 50 it is not going to be the same risk as if I buy 10 contracts of SUNW with a delta of 50.
    #10     Jan 31, 2007