Hi all, I purchased 3 calls, each with a delta of 80, expiring in 2 months. I purchased the same with 3 puts... each with a delta of -80, expiring in 2 months. So the total call delta is 240, and the total put delta is -240. Now, when the underlying stock moves up, I notice the deltas on the calls move up, for example, by 10, and the deltas on the put move down by 10. The call delta is now 250 and the put delta is now -230. Here are my questions: 1) if the underlying keeps moving up, my net delta will be +20, +21... +40, etc. But I notice my put options loses a lot more money than my call options gain. So i'm not gaining, for example, 40 cents for each dollar that the underlying moves up (with a net delta of +40). why would the put options lose more money than the calls gain if i have a positive delta? is it volatility? or something else? I know the pricing of options is complex and it's something i'm not understanding. Thanks!
I'm guessing, because it's not enough information, but the drop can be attributed to lower implied vol and time passing. To make money on these positions, you need moves away from the strike faster than the pricing implies. BTW, the ATM calls and puts can't have a delta of 80. It does not have to add up to 100, but for a two month option it should be closer to 100 than 160.
Thanks Robert. I may titled the thread incorrectly... instead of buying options with a delta of 50, i'm experimenting with deltas of 80. I don't believe this is happening due to time decay, since i notice these losses in 1 or 2 days, pretty much immediately after i purchase the options. Would this definitely be due to lower volatility? or is there something else?
I'm buying the 80 delta put and 80 delta call because i'd like to capture a significant move in the underlying stock... ideally, whichever way the underlying moves, eventually the net + or - delta would help me profit. but, as i mentioned in my original post, if the underlying swings up, the put loses a lot more than the call gains. the fact that the put loses a lot more than the call gains... does that have to do with volatility?
Let me pick an example. Let's say the stock is around 109 and the 120 put and 100 call are both around 80 delta. Just as an example, the 20 point combo,or whatever you call this, adds up to around 25. That means the stock has to move outside that range by more that 5 points. If you buy the 100 put and 120 call, the risk and cost should be close to 5 points. Buy using the 20 delta options, you are trading more liquid options with tighter spreads. You are also laying out around $5 vs $25. There are times when the ITM options has more value, but that is not worth talking about for this example. I suggest you try that next time. Yes, the Vol dropped.
As the stock moves up the IV of the options will drop (basically in price). Welcome to the 'merican market.
got it. so it does have to do with volatility. why is it always volatility! Robert, the reason i'm purchasing the puts and calls with 80 deltas, rather than calls with 20 deltas, is because i would like for the position to profit if it goes down as well. if the underlying goes down, the puts will now gain more in value than the calls lose. ... anyway, this doesn't work, since the volatility drop if the underlying goes up screws everything up (puts will lose more than the calls gain).
First of all... why do you buy the ITM's instead of the OTM's? It would be a cheaper bid/ask spread to cross if you would buy the d20 call and d20 put... so the strangle. It has the same payoff as you have now, but the bid/ask spread is likely smaller. Second, IV in the ITM call is probably a fair bit higher than the ITM put (skew) so the ITM call loses more time value because the theta is higher. Third, if IV's fall, because of the skew the ITM call's vol will drop a bit more than the ITM put. Also the vega is higher on the call vs the put.
I'm just pointing out that you get the same risk reward, better liquidity and much lower margin requirement by using the OTM options. The margin difference is material.