Option Delta, Theta, Strike Price and When to Sell
September 9, 2024 Issue # 26
You may be able to beat the odds by paying attention to specific data points when trading options. (Disclaimer: Option trading involves risk. Past performance does not necessarily predict future results. This article is not investment advice to any specific individual. The content of this article discusses data).
Important data points to pay attention to include delta, theta, strike price and percentage gain or loss. Delta is the amount an option will likely move in relation to the underlying stock’s movement. Theta is a measure of time decay, the amount an option will decrease as time passes. The strike price is the price at which the stock will be purchased when a call option option is exercised (or sold when a put option is exercised).
It is best to purchase a call option at or slightly in-the money. that is at or above the strike price for call options. If the stock rises, the delta will increase which means the call option will move more rapidly in relation to the underlying stock price. If the stock falls, the delta will decrease resulting in the call option losing value more slowly in relation to the underlying stock price.
When purchasing an option you also have to decide how far the option is from expiration. When selling an option you need to decide what percent profit to take. Options and stocks usually do not increase in a straight line. There are pull backs. Time decay (theta) causes an option to decrease over time even if everything else stays the same. Implied volatility can be important as it indicates how expensive or cheap an option is. Implied volatility is high when the underlying stock is expected to make a big move.
We will discuss some trades over the past few months, and give details about purchasing and selling decisions. Over a six month period, these strategies resulted in a 130% profit with proceeds reinvested.