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Delta Options Trading Course PDF
Delta Options Trading Course PDF
DELTA
OPTIONS
TRADING
COURSE
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is not guaranteed as to its accuracy or completeness. No responsibility is assumed
for the use of this material and no express or implied warranties are made. Nothing
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INTRODUCTION
Every time we invest we want to maximize our chance of making a profit
and at the same time carefully limit our exposure to loss. Futures trading
offers tremendous chances for huge profits, but there are always chances
of substantial losses too. To be successful as futures traders, we must do
everything possible to control the size and the frequency of losses. Every
professional futures trader ranks risk control as the most important tool for
successful, profitable investing. If the losses can be controlled, the big profits
will eventually roll in. That is simply how the futures markets work.
There are many ways to approach risk control, but most of them also
put a cap on the chance of really hitting a big pay-off. In return for safety,
profit potential is usually given away. There is, however, a powerful trading
secret that gives you both edges of the sword: TOTAL RISK CONTROL
and UNLIMITED PROFIT POTENTIAL! In this, The Worlds Most Powerful
Money Manual & Course Bonus Pak. I will teach you the best big money-
making and, at the same time, risk-controlling techniques ever discovered:
DELTA OPTIONS trading. With DELTA OPTIONS trading, you can
actually DOUBLE or TRIPLE the size of your profits and at the same time,
COMPLETELY limit your risk. Of course there is some cost to this powerful
tool, but it can be a very low cost relative to the profits of DELTA OPTIONS
trading. After working through this Bonus Pack you will understand the
techniques, risks and huge reward potentials of DELTA OPTIONS trading
and will be ready to use this new power-trading secret.
WHAT IS AN OPTION?
When we purchase an option, we are buying the right to do something
during a specific period of time to come. We do not have to do it, but we
own the right to do it. A futures option is the right to buy (a CALL option) or,
alternatively, the right to sell (a PUT option) a particular futures contract at
a set price (called the STRIKE PRICE) during a limited period of time. The
time the option ends is called the EXPIRATION, and the price we must pay
for the option is called the PREMIUM.
These are the first five words. By the end of this course, you will
understand them and be able to use them. For a specific trading example,
we will look at using options to trade in the Gold market. Gold is just one
example of a market we can trade using options. Everything said here about
Gold options applies equally to all the other markets with options too. These
include the stock indexes, Silver, Oil, Treasury Bills and Bonds, foreign
currencies, grains, meats, Sugar, and many more. In fact, every major
market with enough price action to make people wealthy can be traded
through the use of options. But for our examples, lets now just talk about
Gold.
Suppose we believe the price of Gold is going to rise over the next
few weeks. We can purchase an option to buy Gold (an option to buy is a
CALL option) at a set cost per ounce, during a period of time fixed by the
EXPIRATION date of the option we choose. This set cost at which we can
buy Gold is called the STRIKE PRICE of the option. The amount of time we
have to use, or exercise, this option is set by the EXPIRATION date. We can
choose an EXPIRATION date many months away, a few weeks away, or just
a few days away. Which EXPIRATION we choose depends on the period of
time in which we think Gold will move up to our target price. The option can
only be used, or exercised, on or before that EXPIRATION date.
Exactly how much each Gold option costs depends on how likely traders
in the market believe it is that the price of Gold will reach and exceed the
STRIKE PRICE of the option. If we purchase the 460 STRIKE Gold option
when Gold is trading at $420 an ounce, Gold will have to move up over $40
an ounce before our option would be worth using. There is no sense in using
our option to buy Gold at $460 an ounce if we can simply go out and buy
Gold on the market at a price less than that. But if Gold does move up, say
to $480 an ounce, we can profitably exercise the option. We have the right to
buy it at $460! We can exercise our option and buy the Gold at $460 (our set
STRIKE PRICE), and then if we wish, immediately sell it back at the current
market rate of $480. By doing this, we pocket a profit of $20 per ounce. Each
Gold CALL option gives the right to buy one futures contract of 100 ounces,
so we would be able to make a quick $20 an ounce on 100 ounces, or a total
of $2,000 ($20 x 100 ounces)! To determine our net profit on this transaction,
we must deduct from the $2,000 we receive at sale, the original cost or
PREMIUM, we paid for the option.
PREMIUM for buying the option. We might think of each STRIKE PRICE
option as a different commodity. While prices will move in similar directions,
each will behave a little differently.
Exactly how much each Gold option costs depends on how likely traders
in the market believe it is that the price of Gold will reach and exceed the
STRIKE PRICE of the option. If we purchase the 460 STRIKE Gold option
when Gold is trading at $420 an ounce, Gold will have to move up over $40
an ounce before our option would be worth using. There is no sense in using
our option to buy Gold at $460 an ounce if we can simply go out and buy
Gold on the market at a price less than that. But if Gold does move up, say
to $480 an ounce, we can profitably exercise the option. We have the right to
buy it at $460! We can exercise our option and buy the Gold at $460 (our set
STRIKE PRICE), and then if we wish, immediately sell it back at the current
market rate of $480. By doing this, we pocket a profit of $20 per ounce. Each
Gold CALL option gives the right to buy one futures contract of 100 ounces,
so we would be able to make a quick $20 an ounce on 100 ounces, or a total
of $2,000 ($20 x 100 ounces)! To determine our net profit on this transaction,
we must deduct from the $2,000 we receive at sale, the original cost or
PREMIUM, we paid for the option.
VOLATILITY
How much PREMIUM will we have to pay for our Gold CALL option?
Remember, to obtain the profit in the above example, the price of Gold
had to move from $420 per ounce to $480 per ounce, and this is a pretty
big move. So how much is that option with a 460 STRIKE going to cost
us to begin with? Well, that depends on how likely traders in the market
think it is that Gold will make a big move up. If the price of Gold has been
rather steady, and there have been few major moves, traders will figure the
chances of Gold making a big move upwards are rather small. It will not
cost very much to buy a Gold option with a STRIKE PRICE way beyond
what traders think it is likely to be worth during the life of the option. This
perception of how active a market is and how likely it is to make a big move
is called the VOLATILITY of the market the sixth word in our glossary of
option trading. When VOLATILITY in a market is low, it means prices are
very stable and big moves in price seem unlikely. When VOLATILITY is high,
the market is making big price moves.
Please note, you dont have to exercise your profitable option. You can
sell it to someone else for a nice profit.
So back to the first part of our question, what option STRIKE PRICE
should we buy?
The answer depends partly on how much we want to spend on the option
PREMIUM. The STRIKE PRICES closest to the current trading price of Gold
will always be the most expensive. These are the options most likely to pay
off. Some STRIKE PRICES will even be below the current price of Gold, for
example, a 400 strike option when Gold is at $420. These options that are
already in-the-money are the most expensive. The 400 STRIKE option
gives one the right to buy Gold at $400 an ounce when it is currently selling
for $420 an ounce. This option will cost at least as much as the $20 an
ounce it is already worth (its current intrinsic value).
Generally it is best to buy the option with a STRIKE PRICE one or two
steps away from the current market price of the futures contract. In this case
when Gold is trading at $420 an ounce, it is probably best to buy the 440
STRIKE PRICE option. If VOLATILITY is high, we might want to consider
the 460 STRIKE option, but we must always remember that the farther away
the option STRIKE PRICE is from the current price of Gold, the less likely it
is that we will make money on the option. When we buy a distant STRIKE
PRICE (a far-out-of-the-money strike), we pay less money, and have less
risk, but we usually also have a lower chance of making a profit.
TIME IS MONEY
The third question: Which EXPIRATION time should we choose for our
option purchase?
If nothing happens and prices stay the same, the person who sells us
the option wins and pockets all, or part of our money. We have lost the
PREMIUM we paid, but nothing more. If, however, things do change, and
prices move as we thought they might when we bought our option, then we
pocket the profits. Thats why we bought the option in the first place!
The more VOLATILE the market, the more we will pay for time.
VOLATILITY implies there is a greater chance that things will change, given
enough time. So our PREMIUM will go up. When we buy an option, we are
truly buying time, and all the chances that time offers. The more time we buy,
the more we will pay. How much time to buy (how distant an EXPIRATION)
depends on our market strategy. With most trading strategies, it is unwise
to buy an option much more than 90 days long. The PREMIUM paid for an
option longer than this is usually just too high. Sometimes, time does cost
too much!
option. When there is little opportunity time left in the option, we pay little
for it.
options on a given futures contract since they all vary in a specific related
way with the futures prices, but it can take some time and study to visualize
these relations.
The value of an option depends on how likely traders in the market think
it is that prices of the underlying futures will exceed the STRIKE PRICE of
the option. Look at this example: It is now January and April Gold futures are
currently trading at $470 an ounce. We decide to buy one CALL option for
the April Gold contract with STRIKE PRICE of 500. This option has 60 days
left until EXPIRATION. Remember, the CALL option gives us the right to buy
Gold at $500 an ounce any time during the next 60 days, up until mid-March,
at which time the option expires (an option on the April futures contract
usually expires in March always check the actual date with your broker). This
option PREMIUM, or cost, is $2.50 per ounce on the 100 ounce contract,
But Gold is trading currently at $470 an ounce, well below the 500
STRIKE PRICE of the option. What will happen to the value of this option in
the next week or two if the price of Gold goes up? Suppose in the next few
days the price of Gold increases to $480 an ounce, what happens to the
value of our option?
The question we are asking is simply, how much will the value of our
option increase for every dollar that the price of Gold increases? This is
where the concept of DELTA enters DELTA is change. Here is the definition
of DELTA: The DELTA of an option contract is the amount the price of an
option will increase or decrease with each increase or decrease in the price
of the futures contract. In this example, the DELTA tells us how much the
price of an option will change with each change in the price of the April Gold
futures, and the Gold futures contract our CALL option gives us the right to
buy.
The answer to our question depends on how close the current trading
price of Gold is to the STRIKE PRICE of our option, and how much time
remains until EXPIRATION. There are complex mathematical equations that
can be used to calculate what the DELTA should be, but I will teach you how
to figure it out very simply using a few days information obtained from The
Wall Street Journal, Investors Business Daily, or your broker. I will also teach
you some rules-of-thumb for estimating the DELTA values without using any
calculations at all.
CALCULATING DELTAS
In our example above, we purchased a CALL option with a 500 STRIKE
PRICE when Gold was trading at 470. We paid $250 for this option It is now
5 days later, and the price of Gold has increased to 480. Did the value of
our option change is it now worth more than $250? The answer is of course
yes, but how much? First, what happened to the price of Gold? The price of
Gold went up $10 per ounce, so the value of a 100 ounce futures contract
increased by $1,000 ($10 per ounce x 100 ounces). What happened to the
options PREMIUM? Our options PREMIUM, or value, did not increase as
much as the futures price did. After all, the price of Gold is still below our
STRIKE PRICE by $20, but the price of Gold is now closer to the STRIKE
PRICE, and there is a greater chance now that it WILL exceed the STRIKE
Instead of waiting longer for the price of Gold to go higher and also taking
the risk of prices instead declining we could now sell our option back at the
current trading price of $450. This would result in our pocketing a $200 profit
($450 received on sale of the option minus $250 paid for the option = $200
profit). That is more than an 80% return in five days! We can alternatively
choose to hold the option longer and hope Gold prices continue to rise.
Remember, by holding the position, we also accept the risk that a decline in
Gold prices will cause our CALL option to lose value.
In this example, the price of Gold increased $10 an ounce (from 470 to
480), but the value of our option increased only $2 per ounce (from 2.50
to 4.50). This means that for every dollar the price of Gold increased, our
option increased $0.20 or 20% of the futures price change. Remember,
DELTA is the amount the option value changes per change in the futures
price. This can be thought of as a percent of the futures price change.
In our example, the price of April Gold is now at $480. Suppose in the
next two days it makes a big move up again, to $490.What will happen to the
value of our option? Well, we calculated the DELTA before to be 0.20. Using
that DELTA, we would expect our option PREMIUM to increase 20% of (or
0.20 times) the change in the futures price. The change we might expect
in the options value is then 0.20 x $10 = $2. That would mean our option
PREMIUM, or value, would increase by another $200 ($2 per ounce x 100
ounces).But the answer is actually better than that!
As the futures price gets closer to the STRIKE PRICE, the DELTA
increases. That means the value of the option increases by a larger
increment for every increased in the price of Gold futures. The futures price
has increased from $480 to $490 an ounce. If we look at The Wall Street
Journal we will see that the PREMIUM of our option has now increased
$3.10 from $4.50 to $7.60 an ounce. The futures price increased $10, from
$480 to $490 per ounce.
For every $1 change in the price of Gold, our option has changed $0.31,
or 31% of the change in Golds price. Notice that the DELTA is increasing as
the price of Gold moves closer to the STRIKE PRICE of our option. We are
making MORE money for each dollar increase in Golds price as the price
moves up. In the move from 470 to 480, we made $0.20, or 20%, for every
$1 increase in the price of Gold. As the price increased from 480 to 490, we
made $0.31, or 31%, for every $1 gain in Gold prices. Our option is gaining
value faster as the price of Gold gets closer to our STRIKE PRICE! This
is the magic of DELTA as prices move in our direction, we actually make
money faster, our options value increases by larger and larger percentages
of the change in Golds price! The reverse also holds, as prices move away
from us, we lose money more slowly as the DELTA decreases. As prices
move against us, our options value decreases by smaller and smaller
percentages of the change downward of the futures price.
What happens if the price continues to move up? If the price moves to
500, the STRIKE PRICE of our option, we will make $0.50, or 50% for every
$1 move in the Gold futures prices. Should the price still move higher, the
DELTA will continue to increase until it approaches a value of 1.00, or 100%.
When the DELTA is 1.00, the option PREMIUM will change 100% of the
change in the Gold futures price. A $1 move in the price of Gold will produce
exactly the same $1 move in the option PREMIUM (or dollar value). This
occurs when the option is far-in-the-money, when Gold futures are trading
far above the STRIKE PRICE of our CALL option.
As the price moves above the STRIKE PRICE, the DELTA value will
increase to nearly 1.0, at which point the option value changes dollar-for-
dollar with the futures price. As the price falls away from the STRIKE PRICE,
the DELTA will decrease towards zero. When the futures price is way below
the STRIKE PRICE, the option will be nearly worthless, and changes in the
futures price will cause very little change in the options tiny remaining value,
thus the DELTA will be close to zero. The exact configuration of the curve
depends on the VOLATILITY of the market, and the time remaining until
EXPIRATION of the option. But it will always have this S shape, with the
DELTA value of 0.50 occurring at the STRIKE PRICE of the option.
Now divide [a], the change in the option price, by [b] the change in the
futures price. The result is the DELTA. You will find that with practice, you
can easily do this simple calculation in your head or on paper in just a few
seconds.
Suppose, again, that we think the price of Gold is about to go up. Lets
examine how we can use a DELTA OPTION trade to maximize our profits,
and compare the DELTA strategy to simply buying a futures contract.
Consider this situation: It is January, and there is increasing international
unrest, we expect new problems in the Persian Gulf, and we think that any
more inflationary news will push the price of Gold substantially higher in
the next few weeks. We have $2,000 to risk, and want to establish a long
position in Gold. The price of Gold is currently $480 an ounce. The margin
in Gold is about $2,000 per contract, so we could buy one Gold contract and
use our risk capital to meet the margin requirements of this position. We buy
one Gold futures contract at $480, and deposit our $2,000 as margin.
In the next few weeks the price of Gold takes off and moves rapidly
higher. The price reaches $540 an ounce, and we sell our Gold contract. Our
profit is $60 an ounce on 100 ounces, the size of the futures contract. Our
total profit is $6,000. Not bad.
But suppose prices went the other way. There was peace in the
Persian Gulf, inflationary expectations died, and the price of Gold crashed
downward. Every dollar that the price of Gold moves down costs us $100.
When the price of Gold reaches $470 an ounce, we will have lost $1000.
Your brokerage firm will demand that additional margin be deposited. The
price finally moves down to $420, we run out of money for further margin
deposits, and exit the position. Our total loss is $6,000. Terrible.
$2,000 to risk, and decide to try a DELTA OPTION trade. Instead of using
our money as margin for a futures contract, we will buy several Gold options.
The idea of a DELTA OPTION trade is to purchase several PUT (or CALL)
options so that the combined DELTA of the options we buy is about 1.0.
If the options we choose to buy have a DELTA of 0.25, we would buy four
options. Why four?
Each option will initially increase in value 25 cents for every dollar
increase in the futures price that is what a DELTA of 0.25 means. The total
DELTA of an option position is calculated by adding the DELTAS of all the
options together. In this case, the total DELTA of the position equals the sum
of the four individual option DELTAS, 0.25 + 0.25 + 0.25 + 0.25 = 1. Since
we own four options, we will make 25 cents on each option when the price of
Gold increases $1. With our total position of four options, we will make $1 for
every $1 moved in Gold. The DELTA of our total position will initially be 1.
options? The DELTA on each option is now 0.5, and the total DELTA of our
position is 2 (4 x 0.5 = 2.0). We are now making $2 for every $1 increase
in the price of Gold, or twice as much as we would make had we bought a
futures contract!
As the price of Gold continues to rise, we make more and more for each
dollar move as the DELTA of our options increases. If the price reaches
$540, the DELTA of each option will be over 0.90, and our total position
DELTA will be 3.6. We will be making $3.60 for every $1 increase in the
price of Gold now we own the profit power of four-hundred ounces of Gold,
instead of the single one-hundred ounce futures contract we might have
been able to purchase using our original $2,000 as margin!
Now notice the profit line of the DELTA OPTIONS trade. It is a curved
line, and a line curved in a very favorable way. As the price goes in the
direction of our trade, we make more and more. When the price moves
against the trade, downward, we lose incrementally less, until our maximum
loss of $1,800 the amount of our original investment is reached. If the price
of Gold moves up to $540, we will make over $14,000, well over twice as
much as with a single futures contract. When the market drops suddenly,
and against our expected projections, we lose a maximum of $1,800, the
amount of capital we chose to risk, and far less than we might lose on a
futures contract. There is never a chance of a margin CALL. Our risk is
defined and totally limited, and our profit potential, depending on how far
Gold prices move up, is doubled, tripled, or ultimately, nearly quadrupled! A
wizard once said that magic is simply power discovered unexpectedly. Here
resides the magic of DELTA: Unexpected and unlimited power to pro fit,
amazingly allied with total and predictable control of risk. Used in the right
way at the right time, this is a magic that can make futures-trading wizards
rich!
Notice that between 465 and 495 the DELTA OPTION profit line is below
the futures profit line.In our example trade, if Gold prices make a small
move, say from 480 to 490, with the DELTA OPTION trade we would make a
profit of $675. Had we purchased a Gold futures contract instead of a DELTA
If prices stayed the same, that is, Gold continued to trade at $480 per
ounce, our futures position would be a break-even venture. We would
neither make nor lose money (excluding the brokers commission). Our
DELTA figure 2 option position would, however, lose money. As every day
passes, our options with a 500 STRIKE PRICE are losing TIME PREMIUM.
Remember, time is money! Indeed, if we held our position all the way until
EXPIRATION of the options, and prices did not move at all from 480, we
would lose our entire investment of $1,800. This is, of course, because our
500 strike options are out-of-the-money and will expire worthless.
The cost of a DELTA option position is this: If prices fail to move much
one way or the other, one makes slightly less or loses slightly more than
he or she would with a futures position. There are two clear advantages
of a DELTA option trade: If prices move dramatically in our favor, we make
far more than we would on an outright futures contract; and if prices move
strongly against us, we lose far less.
Every two or three months a price trend occurs in one of the many futures
markets that offers tremendous opportunity for profits. Through the use of
the DELTA option strategy, those profit opportunities may be amplified while
keeping the risks limited. No one catches every big move, but with diligence
and study, wizards and with the right tools eventually will find themselves in
the right place with the right magic. Lets examine two key events in 1987
which would have made any DELTA option trader rich, IF he had used
his magic at the right time. After reading these, proceed to the workbook
exercises at the end and see what you have learned.
A SILVER CROSS
William Jennings Bryan inflamed American political rhetoric with the
theme of Silver eighty years ago, and the fire is still burning. Nothing, but
nothing, moves like Silver. Remember this, because every few years the
theme is repeated again and again, fortunes are made and lost in the tinkling
sound of fury of the Silver market.
So in the Spring of 1987, when Silver started to heat up, the wizards were
ready. A DELTA option strategy is perfect for this market when it begins to
heat up. This is a dangerous market because it has proven its ability to move
both ways very, very quickly. A DELTA option position perfectly multiplies the
upside potential of a breakout and eliminates the risk of a disastrous move
downward. A good trader knows he will be wrong often, but when he is right,
he is very right.
In the next three weeks the market went wild. The price of Silver surged
to well over $10 an ounce during three limit moves upward, and the 700
strike option was worth over $20,000 on the final day of the move. Using
the DELTA option strategy suggested, and purchasing three options, our
total profit could have been $50,000 to $75,000, depending on the moment
we chose to exit the position!! I know people who did precisely this, except
some of them made much more I should add, I also know people who were
too greedy to take their huge profits, who wanted more, and who now have
only regrets.
Our total risk was $1,800 OR LESS! In most instances, if the market fails
to move, we will be able to exit our position with a loss well less than our
maximum risk. In fact, this is one of the principles of DELTA OPTION trading:
If your position loses half of its value, exit the position and take the loss.
Using this loss-limiting technique, our total risk could have been less than
$1,000. Our profits were 50 to 75 times this amount! We could have been
wrong twenty or thirty times (assuming we had that amount of money to
invest) before we hit this big move, and still have made a huge profit on our
total investment (losses included).
But this was a rare case, you say. WRONG! Every few months a market
makes a move like this. In many instances in markets less VOLATILE than
Silver, a position can be entered with less than $500 an ounce or $1,000 of
risk capital. Not every position will pay off, many will result in losses. But with
diligence and skill and maybe a good dose of luck now and then big profits
can be pocketed.
Hum, time for the wizards hat. What is our tool today, rat teeth, bat wings,
or essence of toad blood? Ah, yes, of course! DELTAS! The time is ripe,
the broth is bubbling and steaming. Where it will go, nobody truly knows
not even wizards. But wizards do know the risks and the right tool for the
moment. The autumnal equinox has passed, Halloween is coming. It is mid-
October, and time for a little DELTA magic. Being by nature pessimists, we
figure the stock market has topped out, and we are going to bet it will make
a move downward. We know we could be wrong, and want to limit our risk
against a dramatic move upward, since we know that, too, is a possibility.
Our solution: a DELTA OPTION trade.
The market is trading around 330 on the S&P 500 Index, and the 310
PUTS have a DELTA of about 0.25. They can be purchased for $900 each.
We could trade the New York Stock Exchange Index futures with a smaller
contract size and PREMIUM, but we decide to trade the S&P and risk a
larger amount the cauldron is bubbling in an auspicious fashion, and we
are going to shoot for the big bucks. We take four options, with a combined
DELTA of 1.0.Our risk capital is $3,600. We will risk half of this, and exit the
position if our loss exceeds $1,800.
Now that is an extraordinary move for the stock market. Moves like this
are not so unusual in Silver, Sugar, Cocoa, Soybeans, Gold, Crude Oil,
and many, many other markets which we can now trade with the DELTA
OPTIONS strategy. If we would have taken a futures position, we would
have made one-fourth the profit on this move, while accepting an unlimited
risk. Instead, we made four times as much, and fully limited our risk. Magic is
what you make it. This may just be sleight-of-hand, but it sure can work.
AN IMPORTANT REMINDER
No strategy of trading futures contracts can guarantee profits. To make
money, one must always accept some risks. By using different investment
and trading strategies, the ratio of possible risk and reward can be varied
but some risk will always remain. You must understand the risks before you
undertake any investment. Although DELTA OPTIONS trading limits risk and
offers tremendous opportunity for profits, there is always the risk of loss.
An understanding of this risk is essential. Never risk money that you cannot
afford to lose, BECAUSE YOU MAY INDEED LOSE IT!
A. There is no easy answer. You must decide when to trade and what
strategy to use. Rely on all the information you currently use or can obtain.
When it appears that a market has strong potential for a major move, that is
the time for a DELTA trade. You will be wrong frequently, but when you are
right, profits can be huge.
A. Calculate the DELTA of the various strikes using the technique you
have learned here. Remember that the option STRIKE PRICE at the current
futures trading price will have a DELTA of about 0.5. It is best to trade
options with a strike between 0.25 and 0.35.
A. That depends on how much you can risk. With a limited pocketbook,
it might be best to buy just one. This is not a DELTA trade but it can work.
Usually, it is best to buy three or four options with a total DELTA of around
1.0, give or take a little.
A. The closer to EXPIRATION, the faster the options lose time value.
This loss of value is particularly fast in the last 20 or 30 days before
EXPIRATION. However, the closer to EXPIRATION, the cheaper the options
are. Usually it is best to buy options with about 45 to 75 days left before
EXPIRATION. There are times when you may believe a big move is just
around the corner. In that situation, buying an option with less than thirty
days until EXPIRATION may be cheaper, and end up more profitable on a
percentage-of-investment basis. Remember, if you are wrong, this option
will lose value more quickly than one with more time left. As a rule, stick with
the options that have about two months left until EXPIRATION when trading
DELTA OPTION positions.
A. Remember the old futures trading adage, Bulls make money, bears
make money, but pigs just get slaughtered. If your position loses one-half of
its original value, exit the position and take the loss. NEVER hold a position
all the way to EXPIRATION if it is not in-the-money! On the other hand, if a
position is becoming very profitable, let it ride a while. But also remember
that other great gem of wisdom: Most fortunes are lost while trying to make
the last dime. The last dime is NOT WORTH A FORTUNE. Whenever you
are holding a profit that makes your blood bubble with greed for more, exit
the market. Let your greed simmer down, and pocket the profits. Put them in
the bank, but a new car with them convert them into something real that you
can see and feel. When paper profits become real things, their true value is
better appreciated. There is no room for an easy come, easy go philosophy
in this business. Profits do not come easily. When they do come, DO
NOT LET THEM GO! With profits in hand, there will always be another big
opportunity coming.
good broker will help. Look for a broker who can help calculate the DELTAS,
and who will help watch the markets with you. Options trading is one area of
futures trading where having a knowledgeable broker really helps.
A. You can start trading with as little as $1,000, but I suggest $2,500 or
even $5,000. This money must be risk capital. Futures and futures options
trading is highly speculative, and while large profits are possible, so is the
loss of your capital. While you may be lucky and make a large profit on your
first trade, you might also be wrong and lose your money. Never put all of
your capital into one trade. Limit your risk on any one trade to a quarter or
less of your risk capital. Many successful traders make money on only one
out of every four or five trades; their profits are just much larger than their
average losses. To accomplish this, they limit their risks on every trade, and
when they do make profits, they protect them.
A. You can start trading with as little as $1,000, but I suggest $2,500 or
even $5,000. This money must be risk capital. Futures and futures options
trading is highly speculative, and while large profits are possible, so is the
loss of your capital. While you may be lucky and make a large profit on your
first trade, you might also be wrong and lose your money. Never put all of
your capital into one trade. Limit your risk on any one trade to a quarter or
less of your risk capital. Many successful traders make money on only one
out of every four or five trades; their profits are just much larger than their
average losses. To accomplish this, they limit their risks on every trade, and
when they do make profits, they protect them.
be trading more than one contract, and commissions could become very
expensive. You should pay only a round-turn commission, which means
ONE commission to both enter and exit the trade.
WORKBOOK EXERCISES
1.The DELTA of a Gold CALL option is 0.35. If the Gold price increases by
$10 per ounce, how much will the PREMIUM of this CALL option increase?
Answer: A DELTA of 0.35 means that for every $1 increase in the Gold
price, there will be a $0.35 increase in the option. If we multiply the DELTA
times the change in the price of Gold, we will get the expected change in the
price of the option. In this case, multiply the DELTA of 0.35 times the change
in the price of Gold, $10, and you will get the answer of $3.50. From a $10
increase in the futures price, the PREMIUM of the CALL option with a DELTA
of 0.35 should increase $3.50.
For the 675 STRIKE option, the change in the option price is 0.15 - 0.12 =
0.03. The change in the futures price is again 7.00 - 6.90 = 0.10. The DELTA
is 0.03 / 0.10 = 0.30. The DELTA of the 675 STRIKE PUT is 0.30.
3. A Swiss Franc PUT option has a DELTA of 0.27. The price of Swiss
Francs falls from 68.50 to 68.10. Will the value (PREMIUM) of the PUT
option increaser decrease? How much?
Answer: The PREMIUM of the option will increase. This is a PUT option
which means that a fall in price makes it more rise in price will make a CALL
option more valuable. The DELTA of the option is 0.27, and the price change
of the futures contract was 0.40. Multiply the DELTA by the change in the
futures price to get the change in the option PREMIUM: 0.27 x 0.40 = 0.11.
The PUT options PREMIUM will increase by 0.11.
Answer: The answer is three. Each option has DELTA of 0.33. If we buy
three CALLS the total DELTA of the position will be three times 0.33, or
about 1.0. With a DELTA of 1.0, every dollar gain in the futures contract will
result in dollar gain in our total options position (33 cents on each of the
three options).
7. Each of the CALL options in question #6 is selling for $850. How much
will it cost to establish the total position? What is our maximum risk on this
position?
Answer: We are buying three options at $850. Our total cost is $2,550.
This is also our maximum risk. We can only lose the amount we have risked,
nevermore. In practice, we should try to limit our risk to one-half of the
amount paid for the position, or about $1,275. If the value of our position
ever decreases to this amount, we should exit the position and take the loss.
Answer: We have three options, each with a DELTA of 0.60. The total
DELTA of our position is three times 0.60, or 1.80. Every dollar change in
the future swill result in a $1.80 change in the value of our DELTA OPTIONS
position.