Hello, This is my first post on Elite trader. I have a question that im sure all of you long time traders may be able to answer. I am looking to place a straddle on the market but iv noticed that when the strike price is the same the Delta is different. So, if I use a straddle it is weighted more in one direction than the other.. It looks like the calls have higher deltas at a strike. This caused me to think it would be better to use a strangle to match deltas.Then there is a big gap in strike? Im stuck. I cant call the direction of the market for the next 60 days and want to play both sides how do I go about this in the right way. Any advice would help Thanks
1) "Place" a straddle is poor terminology. Do you want to buy or sell? (Yes, I know you want to buy.) 2) You should expect delta to be different. You might expect the put and call to have the same delta ONLY when the underlying is trading exactly at the strike price. That expectation would be incorrect, but it's a reasonable expectation for a rookie. Calls have higher delta than puts - when the underlying is at the strike - because there is a bias towards the upside. Look at it this way: If stocks did not have an expectation of rising over the long term, few people would buy them. Thus, it's always slightly more likely the market will advance than decline over an extended period of time. 3) Yes, a strangle allows you to be delta neutral. But so does a straddle. You are not obligated to buy an equal number of calls and puts. You can become delta neutral by buying an appropriate quantity of each. 4) Advice: Buying straddles is a very high risk play. Not saying you cannot win, but there is much more involved than merely hoping for a big move. 5) Today, with the huge drop in yesterday's market, IV (implied volatility) is far, far above where it was in recent times. If you do not yet understand how implied volatility affects the price of options, you are not ready to trade those options. This is important because if you over pay for your options, you have almost no chance of having a winning trade. Most rookies fail to grasp this concept until is far too late. Mark http://blog.mdwoptions.com/options_for_rookies/
Thanks for the feedback. Yes I am a true rookie in every sense when it comes to option trading. You cleared up the difference for me as to why the Delta's on the "Long" straddle are different. I did enter a trade this morning but am only trading 1 lot's right now until I stop losing money. You brought up a very good question that has been on the top of my mind. I understand what IV is but im not sure how I can use it in relation to the price of an option? IE what does it mean to the price of a $10 option if the iv 30% or if is 150%? When I entered the Long straddle this morning the calls had been decreasing in value even though the stock had gone up so I saw first hand what the drop in IV did to the option I just dont know how to use IV to my benifit. Thank you again for the feed back its nice to talk to a fellow options trader.
Dude, stay small until you're educated. Also, consider options on the SPY or QQQQ, to get a feel. You WILL lose money, but it will be money well spent, and part of your tuition. Also, instead of buying IV, consider selling it when it's huge. VIX was in the 48 range.
Think as IV being the risk of selling car insurance. You live in a high crime area, you are a new driver, you live in a high accident area or you have made claims in the past. Your insurance company will charge you higher premiums for the same coverage if you didn't have all or some of those black marks against you. Today is an extreme example of IV drop because of the wild market moves. A few days of sideways movement will bring it down to normal levels.
Mark, Are you sure about what you wrote? The reasons why ATM calls have higher deltas than puts are different. I will stay on the side to allow others to write their point of view. PS: when I read your comment, and wrote mine, I am assuming that we are thinking in absolute values for the put delta. I am mentioning it so that readers do consider the delta sign as the topic being discussed.
Calls have a higher delta than puts (speaking of absolute value of course) even when the underlying is exactly at the strike price. The reason for that is the effect of the lognormal distribution, which is assumed by every pricing model I'm aware of.
ATM delta of call can even be close to 1. (and the delta of a put close to 0.) The reason is not the bull bias. Still waiting for others to provide valid reasons.
In addition to what I posted above, stock options are priced off the forward price, not the spot price. So the more time remaining and the higher the interest rate used, the higher the forward price and, therefore, the higher the call delta.