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You wrote:
>I need some tips on options trading. I have a OEX system that produces, on
average >between 3-6 OEX points per trade. So when the delta of the option is
1, I can expect a 3->6 point move in the option... So an out of the money
option would move from 3 to 6 or 9, >instead of an in the money option that
would move from 20 to 23 or 26.
I think you are misunderstanding the delta. Two options with the
same expiration but different strike prices can not have the same delta
(except possibaly very far in or out of the money options). As a general
rule to get a delta of 1 an option must be in the money and depending on how
far out of the money an option is the delta will be less that 1, with far out
of the money options having a delta of 0.
A more likely senario to your example above would be if the in the
money option, with a delta of 1 moverd from 20 to 23 to 26 the out of money
option. with a delta of 0.12 might move from 3 to 3.25 to 3.5. Now you can
do the math to decide which is best. If you have 1 in money contrace at 20
($2000.00)and the OEX moves 3 points the contract moves 100x3 = $300.00. or
15 % profit. If you have 7 (7x$3 = 2100) out of money contracts at 3.00
your total move is 700 x .25 = $175 or 8.33%
>Also it would seem that the deltas of in vs out of the money options is
different. The in or >at the money options seems to approach a delta of 1
during option expiration week more >quickly that the out of the money
options. Is this correct?
Yes. Another way to look at delta is that it is approximately the
probability of the index (or stock) being above the strike price at
expiration. Example: with the OEX at 900 an Oct 980 call with a delta of
0.20 has about 20% chance of the OEX being over 980 by Oct expiration.
>Right now I am waiting to trade only during option expiration week, and I
usually only buy >at-the-money options. Is this an appropriate strategy given
that I can expect between 3-6 >OEX points per trade?
Yes. However when you understand delta you may be able to find
other profitable trades using your system, other than expiration week. For
example if an option has a delta of 0.75 you could get 4.5 option points for
your 6 point OEX move (6 x .75).
>I have Larry McMillian's book, but it offers little advice on these
questions.
Re-read the sections on delta in "Options as a Strategic
Investment. Remember delta is constantly changing both with price and time,
but I beleive it is accurate for a 10% move per day before it must be
recalculated.
Good luck and good
trading,
Ray Raffurty
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