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DELTA

OPTIONS

TRADING

COURSE

These materials are reprinted from The Delta Options Trading Strategy.

It was initially published in 1994 by The Ken Roberts Company. These

materials are reprinted for informational purposes only, and are not related to

The Greatest Business on Earth. The Greatest Business on Earth makes no

warranties or representations regarding the accuracy of the information, or

Reproduction or use of the text or pictoral content in any manner without

the effectiveness of trading strategies contained in these materials.

written permission is prohibited.

a Barchart.com, Inc. company. All rights reserved.

USA Phone: 800.621.5271 or 312.554.8456

Website: www.crbtrader.com

The information herein is compiled from public sources believed to be reliable but

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

contained herein shall be construed as an offer to buy/sell, or as a solicitation to buy/

sell, any security, commodity or derivatives instrument.

Learn More about TrendTrader at www.trendsinfutures.com

Or call us directly at 312-554-8456 (toll-free at 800-621-5271)

to answer your questions and get started.

CRB Futures Market Service

One characteristic that all successful traders seem

to share is their ability to fully understand the markets

they are trading. - Jim Rogers-Author Hot Commodities

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research they need to stay ahead of the crowds. Why shouldnt you?

Call 800-621-5271 or email gary@trendsinfutures.com

to receive a complimentary trial!

Delta Options Trading Course

SECRET

change and is used in modern day mathematics to describe the

relationship between variables.

potential profit is accompanied by the risk of loss. Your decision

to trade commodities should be based on your particular financial

circumstances and trading objectives.

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.

Delta Options Trading Course

options trading. With these principles in hand, I will reveal the methods

of successful DELTA OPTIONS trading used by top professional traders.

Remember, the subject of options trading can seem quite complex. Dozens

of long textbooks, full of complex equations and terminology, have been

written about options. As a result, most people have even been fooled into

thinking that options trading is just too complex for them to understand. I am

glad it seems that way, because this leaves substantial profit opportunities

waiting for those few of us willing to take advantage of them! There are many

ways to make money trading options in fact, we have produced an entire

course dedicated just to making money with options. DELTA OPTIONS

trading is simply one of the most effective methods of harvesting these profit

opportunities. As with every power-trading technique, there are specific

times when it should be used to magnify profit opportunities, and other times

when it is not very useful. We will conclude this manual with a section on the

techniques for choosing the right DELTA OPTIONS trades.

OPTIONS trading involves learning just SIX WORDS and completely

understanding their meanings. It can be that simple! So, our first job is

to learn these words. After learning the basic six, there is one more word

to learn, the magic seventh word: DELTA. Remember, there are just six

words and a magic seventh word that hold the key to profits in options

trading! So lets get to work!

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,

Delta Options Trading Course

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.

else in the world, what it costs depends on what people think it is worth. The

price we will pay the person selling us the option is called the PREMIUM.

Once we have purchased this CALL option, we have an irrevocable right

to buy Gold at the STRIKE PRICE of the option at any time up until the

EXPIRATION date specified by the option. We have locked in the price we

will pay for Gold no matter how high it might go. Even if the price of Gold

goes way above the STRIKE PRICE of our option, we can buy it at the lower

price set by the STRIKE PRICE of our option. This is our profit potential in

owning the option, and if Gold does make a big move, that profit can be

huge relative to the price we paid for the option! Alternatively, if we are wrong

in our vision of the direction Gold prices will take and the price of Gold goes

crashing downward, we will have lost only the PREMIUM, or price we paid,

for our option. The advantage of this strategy is a limited risk we only

risk the amount we paid for the option, the PREMIUM and yet we retain

unlimited upside profit potential if Gold prices do indeed rise.

Delta Options Trading Course

Look back over the capitalized words. These are the first five of the six

words. Re-read this and define each of the words in your own words as you

read. Then we will move on with our discussion and learn the sixth word,

VOLATILITY.

1. CALL

2. PUT

3. STRIKE

4. PREMIUM

5. EXPIRATION

Now that we have read through the basics, lets examine a few possible

trades. Suppose a few months ago we had suspected that Gold prices were

ready to move up, but we did not want to take the risk of entering a futures

contract trade. Gold was trading at $420 an ounce. We decided to buy an

option.

First question: What would we want to buy, a PUT or a CALL?

right to buy the futures contract at a specific price, called the STRIKE

PRICE. A PUT would give us the right to sell at a specific price, and we

would use a PUT if we thought prices were going down. But we think they

are going up. So we purchase a CALL option. That was the easy question.

The next two questions are going to take a little more review and discussion.

Next question: What STRIKE PRICE should we purchase and how much

PREMIUM will we pay?

Delta Options Trading Course

see there are many possible STRIKE PRICES, all with different prices, or

PREMIUMS. Which one do we want? There is a STRIKE PRICE every $20,

that is at 400, 420, 440, 460 an ounce and so on. The closer the STRIKE

PRICE is to the current trading price, the higher the PREMIUM and the more

the option costs (remember, the PREMIUM is the cost of the option). The

further the STRIKE PRICE is above the current price of Gold, the lower the

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.

Next question: What STRIKE PRICE should we purchase and how much

PREMIUM will we pay?

see there are many possible STRIKE PRICES, all with different prices, or

PREMIUMS. Which one do we want? There is a STRIKE PRICE every $20,

that is at 400, 420, 440, 460 an ounce and so on. The closer the STRIKE

PRICE is to the current trading price, the higher the PREMIUM and the more

the option costs (remember, the PREMIUM is the cost of the option). The

further the STRIKE PRICE is above the current price of Gold, the lower the

Delta Options Trading Course

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.

Delta Options Trading Course

option to us figures it unlikely he will actually have to deliver on the option

he figures prices seem pretty stable and are not likely to go up above the

STRIKE PRICE, or not very much above the STRIKE PRICE. So if Gold is

selling for $420 an ounce and prices are stable (low VOLATILITY), we may

have to pay only a very small PREMIUM for the 460 STRIKE option, as

little as $50 or $100. The more active prices have been, and the more likely

it appears that Gold may move up to the $460 per ounce STRIKE PRICE

of our option, the more the option will cost.If prices have been very active,

that is, very VOLATILE, and moving upward, the option PREMIUM could be

several hundred dollars.

our option and pocket the $2,000. Our net profit on the trade is this amount,

$2,000, minus the PREMIUM we paid for the option. If we paid a low

PREMIUM of $100 for the option, our net profit was $1,900, twenty times the

capital we risked! If we paid a PREMIUM of $400, as we would have during

the Spring of 1987, when prices were VOLATILE, and the PREMIUMS

therefore higher, we still would have had a net profit of $1,600, or an 800%

gain. In either case, if we had been wrong about the direction of the price

move, the most we could have lost was the PREMIUM we originally paid.

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

Delta Options Trading Course

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?

more distant the EXPIRATION DATE (the longer the period we have to

exercise the option), the more we will pay for the option (the higher the

PREMIUM will be). The reason for this is simple:No one knows, to the best

of my knowledge, what the future will bring. It is possible to make reasonable

guesses about the near future based on current circumstances, but about

more distant events we will always be ignorant. The farther into the future

our CALL option to buy Gold extends the more distant the EXPIRATION of

the option the more that option will cost.

it is traded. Each futures contract has multiple different delivery months

throughout the year. Usually these are spaced one, two, or three months

apart, and we can trade options on any of these coming months. When

trading options, always discuss with the broker the exact EXPIRATION

DATE of the option. We must know how much time remains until

EXPIRATION, because this is our period of opportunity. We should note that

the option frequently will expire in the month before the futures delivery date.

For example, an option on February Gold futures will expire in January. By

selecting options on futures contracts with deliveries nearer or further away

in time, we can pick an EXPIRATION DATE for the options contract that is

anywhere from thirty or less days away, to many months away.

Delta Options Trading Course

EXPIRATION

Every day we own the option, chances increase that something will

happen to change the price of Gold. Given enough time be that months or

even years it is very likely something WILL happen to drive the price of Gold

up and make our option very lucrative. This is called the TIME PREMIUM.

A large part of the PREMIUM we pay for an option consists of this TIME

PREMIUM, the chance that something unknown and unexpected will

happen to change prices and make the option profitable. The more time until

EXPIRATION of the option, the more chance there is that circumstances

and prices will change. In purchasing an option, we pay the person selling

the option for his willingness to accept the risks of time and those unknown

events which may make the option a good investment for us.

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!

PRICE far removed from the current trading price of the futures will be

essentially worthless. This happens when the STRIKE PRICE is so far away

from the current trading price that it is impossible, given current VOLATILITY,

for prices to move to or beyond the STRIKE PRICE in the options remaining

time. As the EXPIRATION DATE of an option approaches, and the time

remaining to exercise the option decreases, the PREMIUM (cost) of the

option will usually decrease. When the time remaining until EXPIRATION

is short, there will be very little time value in the PREMIUM paid for the

Delta Options Trading Course

option. When there is little opportunity time left in the option, we pay little

for it.

As the EXPIRATION DATE for the option approaches, the PREMIUM

cost of the option will reflect more and more the intrinsic value of the option.

Time, and the opportunity value of time, has wasted away. If the option is

far-out-of-the-money (the STRIKE PRICE is distant from the current price

of the futures), the PREMIUM will be very small. This happens when traders

decide there is very little chance prices will reach the STRIKE PRICE of the

option and give it value in the time remaining until EXPIRATION.

a CALL option, this means that the STRIKE PRICE is less than the current

trading price of the future. For example, a Gold option with a STRIKE PRICE

of 460 is in the money when Gold is trading at 480. In this instance, the

option is worth at least $20 an ounce, because it grants the right to buy

Gold at $460 an ounce (the STRIKE PRICE), $20 an ounce below the

current market price of Gold futures. This is called the intrinsic value of

the option the amount it is worth in cash if it is exercised. As EXPIRATION

nears, the PREMIUM of an in-the-money option will approach its intrinsic

value, and there will be no additional time value added to the PREMIUM.

At EXPIRATION, the value of the option is equal to its intrinsic value. For

an option which is out-of-the-money, there is NO intrinsic value. The value

of the out-of-the-money option is based on its time, or opportunity, value

the chance that time will change prices and give it intrinsic value. As time

passes, the chance of this happening diminishes, and this value disappears.

At EXPIRATION, there is no time left, and the out-of-the-money option

is worthless. When trading options we must always remember, TIME IS

MONEY.

options with different STRIKE PRICES. Each of these should be viewed as

a slightly different commodity. While they will all undergo changes in value

based on changes in the price of the futures, they will change at different

rates and in different amounts, depending on how close the STRIKE PRICE

of each is to the current trading price of the futures. Options on different

trading months of futures move differently in value because of differences

in their times until EXPIRATION. There are relationships between all the

Delta Options Trading Course

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.

There you have the six key words of options trading: CALL, PUT, STRIKE

PRICE, EXPIRATION, PREMIUM, and VOLATILITY. Do you understand

them? If so, you are ready to explore the magic SEVENTH WORD: DELTA.

CERTAIN YOU UNDERSTAND THEM:

1. CALL

2. PUT

3. STRIKE PRICE

4. PREMIUM

5. EXPIRATION

6. VOLATILITY

DELTA means CHANGE. Change is the key to all profits. It really is a

magical principle; without change, there is no opportunity, no progress, no

growth. In futures option trading, DELTA reflects the amount of value of an

options change relative to the change in value of the underlying futures

contract. An understanding of how option DELTAS work is the key to

understanding DELTA OPTIONS.

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,

Delta Options Trading Course

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

Delta Options Trading Course

The Wall Street Journal, we will see that our April Gold CALL option with a

500 STRIKE PRICE is now worth $4.50 an ounce, or $450 ($4.50 per ounce

x 100 ounces).

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 this instance, the DELTA equals: [a] the amount the option price

increased, $2; divided by [b] the amount the futures price changed, $10.

This is equal to 0.20 (2/10 = 0.20). For every dollar that Gold prices rise, the

options price will move up 20 cents. This is the same as saying the options

value changed by 20% of the futures price move.

The DELTA of an option is NOT FIXED. It varies with the futures price.As

the price of Gold approaches and exceeds the STRIKE PRICE of our option,

the DELTA will increase. That is to say, the value of the option will increase

by a larger amount for every dollar move in the futures price as the price of

the futures approaches and exceeds the STRIKE PRICE.

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

Delta Options Trading Course

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

Delta Options Trading Course

$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.

change with changes in price. Look at Figure 1 on the next page. This graph

shows how DELTA changes for a Gold option with a 500 STRIKE PRICE as

the futures price varies between 450 and 550. On the graph, we have the

futures prices listed along the bottom and the DELTA values up the side.

Notice it is an S shaped curve. As the DELTA of the option decreases

rapidly, then levels off near zero. Notice that when the futures price is at the

STRIKE PRICE, the DELTA is approximately 0.50. THIS IS A GOOD RULE

OF THUMB. An option DELTA will roughly be around 0.50 when the futures

price is at the option STRIKE PRICE. This means that when the futures price

is trading close to the STRIKE PRICE, the value of the option will change

about 50% of the change in futures that is, 50 cents for every $1 change in

the futures price.

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.

Delta Options Trading Course

To calculate the DELTA of an option, we need to have the futures and

option prices from two different days. Take the current issue of The Wall

Street Journal or Investors Business Daily and an issue from one or two

days before. Find the options and futures prices in each. Calculate [a] the

change in the option price between the two days by subtracting the first price

from the second. Do the same for the futures, subtracting the first price from

the second, to find [b] the change in the futures price. (See Figure 1.)

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.

Delta Options Trading Course

maximize our chance of making a profit while carefully limiting our risk. The

problem with futures trading is that the risk can be unlimited. If prices go up,

we make money (if were long), but if they go down, we lose money at the

same rate! What if we could design a strategy that allowed us to make three,

four or five times as much money when prices do go our way, and strictly

limit our risk to a smaller amount if they go against us? Sounds like a good

way of doing things, doesnt it? Well, that is exactly what DELTA OPTIONS

trading does! And that is why we have spent so much time explaining details

up to this point.

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.

again January, and we want to establish that long Gold position. We have

Delta Options Trading Course

$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.

Back to our example. Gold is trading at $480, and the April CALL options

with a 500 STRIKE PRICE have a PREMIUM of $4.50 an ounce, or $450

per option ($4.50 per ounce x 100 ounces = $450). We examine the last

two days prices on The Wall Street Journal, and calculate that the DELTA

of this April 500 Gold CALL option is 0.25 (its PREMIUM has been changing

25 cents for every dollar change in Gold prices). With our $2,000 we buy

four options, at a total cost of $1,800, and save the $200 change. The total

DELTA of our position is 1. We will initially make one dollar for every dollar

change in the price of Gold. (For the technically advanced student only:

These following calculations are made with a market VOLATILITY of 15%,

interest rates at 6%, and 60 days until EXPIRATION but dont worry about

these technical comments.)

$490 an ounce lets say this happens in the next two weeks and our options

now have 45 days until EXPIRATION. As the price moves up, remember

the DELTA of our options is also increasing. At $490, the DELTA on each of

our options has increased to 0.35. We own four options, so the total DELTA

of our position is 1.40 (4 x 0.35 = 1.40).Now for every dollar increase in the

price of Gold, we will be making $1.40 on our option position!! And what

happens when the price hits $500 an ounce, the STRIKE PRICE of our

Delta Options Trading Course

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!

Delta Options Trading Course

Figure 2, above, shows the profit curve for this DELTA OPTIONS trade.

The line marked with the + indicates the profit/loss potential of a single

futures contract. Notice it is a straight line, for every dollar change in the

price of Gold, up or down, there is a $100 profit or loss. When the price

rises from $480 to $540, we make $6,000, or $60 per ounce on 100 ounces.

When the price falls to $420, we lose $6,000.

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!

As you must see, this is a most powerful tool. Unfortunately, there is no

spell that produces gold from lead at least not one that I can share! This

strategy does have a cost, something is given away in return for the power.

Before using the DELTA OPTION approach, you must understand this cost.

Return to Figure 2 and examine the profit lines again. Can you figure out

what is given away in return for the power of a DELTA OPTION trade?

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

Delta Options Trading Course

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.

use option DELTAS efficiently and profitably. This is not the approach to

take every time we trade. As with all tools, it must be used properly to work

properly.

As we see above, a DELTA option position is designed to multiply profits

and limit risks in a big market move. When the markets are going nowhere,

it is not wise to use this strategy. How do we spot a market that is about to

make a big move? If I had a certain answer to that question, I would be a

fool to share it. But there are frequently key times when it seems something

big is about to happen. We may not be certain which way the market will

move, but we know something is going to break loose.

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

Delta Options Trading Course

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.

the upside was possible, and a DELTA option position should have been

initiated. The 700 strike ($7 an ounce) option had a DELTA of 0.35, and three

of them could have been purchased for about $1,700, depending on the day

the position was initiated. The total risk exposure in the position was then

$1,700.

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

Delta Options Trading Course

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.

In October, 1987, many people felt the stock market had reached the

end of the line. Others felt another right move upward was brewing. Either

way, it looked like something major was in the wind. The market had made

a significant, but not major, move downward. In the past, these corrections

had all been followed by explosions upward. But now it seemed that a BIG

move downward MIGHT be close at hand.

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

Delta Options Trading Course

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.

wand in hand, with a strange, rather shocked smile on our faces. It seems

we have just made about $40,000 on each of our four S&P 500 options. Our

$1,800 risk just made us $160,000! My, oh my, do we smile we can even buy

that new sequined wizards cap we have been coveting for our Halloween

costume this year. All the better, we know most of those phony Wall street

Wizards will be wearing hocked garbs to the ball. And people are looking at

us, asking, why is that man smiling?

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!

you have failed to understand any major points, review the manual again.

After completing this course, you are ready to begin paper trading. Try

out your knowledge, practice calculating DELTAS, practice a few DELTA

OPTION trades and see how they work out. At this time, if you have not

already done so, you might want to open your trading account with a

reputable brokerage firm. GOOD TRADING and GOOD LUCK!

Delta Options Trading Course

contracts. Markets that trade less than 2000 options a day are too thin,

and it can be difficult to get good price fills on orders. Your broker should be

able to help you avoid markets where the volume is too low. There are over

a dozen markets, including all the major futures groups, that have this sort of

volume, and volume is increasing quickly and will soon reach this level in a

dozen other markets. Look at the volume figures in The Wall Street Journal

or Investors Business Daily (personally, I think Investors Business Daily has

better futures information. It also includes charts on all the major markets,

updated daily).

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.

Delta Options Trading Course

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.

markets and the results of DELTA trades over a few weeks. While youre

doing this, open your account with a brokerage firm, and use a broker who

understand options. Most brokers will know what an option is, but most do

not understand DELTA trading. If they do not understand it, dont trade with

them. Options trading can be complex, and while you are learning, having a

Delta Options Trading Course

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.

strategy?

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.

understand options and DELTA OPTION trading. Options are not very well

understood by the majority of brokers, no matter what they might claim. Your

broker should be able to rapidly tell you the DELTA on any option you are

interested in. He should have this information available on a computer in his

office. While you can calculate this easily, it is easiest and quickest to just

ask the computer.

trades, and some charge a commission both to enter and to exit the position.

DO NOT work with a brokerage firm that charges a commission to both

enter and exit an option trade!! In DELTA OPTION trading you will frequently

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.

Delta Options Trading Course

markets and the results of DELTA trades over a few weeks. While youre

doing this, open your account with a brokerage firm, and use a broker who

understand options. Most brokers will know what an option is, but most do

not understand DELTA trading. If they do not understand it, dont trade with

them. Options trading can be complex, and while you are learning, having a

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.

strategy?

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.

understand options and DELTA OPTION trading. Options are not very well

understood by the majority of brokers, no matter what they might claim. Your

broker should be able to rapidly tell you the DELTA on any option you are

interested in. He should have this information available on a computer in his

office. While you can calculate this easily, it is easiest and quickest to just

ask the computer.

trades, and some charge a commission both to enter and to exit the position.

DO NOT work with a brokerage firm that charges a commission to both

enter and exit an option trade!! In DELTA OPTION trading you will frequently

Delta Options Trading Course

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.

the DELTA for a series of STRIKE PRICES. On September 1, the December

Silver contract is trading at $7 an ounce. The 700 STRIKE PUT is trading

at $0.23 an ounce, and the 675 STRIKE PUT is trading at $0.12 an ounce.

On September 2, the December Silver contract is trading at $6.90 an ounce.

The 700 STRIKE PUT is trading at $0.28 an ounce, and the 675 strike PUT

is trading at $0.15 an ounce. What is the DELTA of the 700 STRIKE PUT?

What is the DELTA of the 675 PUT?

price by the change in the futures price. Calculating the DELTA of the 700

STRIKE PUT first, the change in the option price is 0.28 - 0.23 = 0.05. The

change in the futures price is 7.00 - 6.90 = 0.10. The DELTA is calculated by

dividing 0.05 by 0.10 = 0.50. The DELTA of the 700 STRIKE PUT is 0.50.

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.

Delta Options Trading Course

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.

every 1.00 change in the value of the futures or option contract is worth

$1,250. What was the dollar value increase in the PREMIUM of the PUT in

question #3?

Multiply 0.11 x $1,250 and we find the dollar value of this 0.11 increase is the

PREMIUM of $137.50.

yesterday to $480 an ounce today. The 500 STRIKE CALL option PREMIUM

decreased from $5.85 to $4.25 an ounce. What is the DELTA of this CALL

option? There are 100 ounces in each contract. What is the dollar value

change in the option PREMIUM?

price by the change in futures price. The option price change is $1.60 (5.85 -

4.25 =1.60). The change in futures price is $6.00 an ounce (486.00 - 480.00

= 6.00). Divide 1.60 by 6.00, and we obtain the DELTA, 0.27. Each contract

is for 100 ounces, and each $1.00 per ounce change has a dollar value of

$100.00. This $1.60 an ounce change in the PREMIUM of the option has a

dollar value of $1.60 an ounce x 100 ounces, or $160.

a long position, and think there will be a substantial increase in the futures

price. There is an international meeting coming up which is expected to

change currency alignments, and although we think this will result in an

increase in D. Mark values, it is possible that there will be a sudden collapse

in prices if the meeting goes badly. This is a perfect opportunity for a DELTA

Delta Options Trading Course

0.33. We want to buy several CALL options so that the total initial DELTA of

our position is about 1.0. How many CALL options should we buy?

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.

Marks moves up rapidly, as we had hoped. The price quickly reaches 58.50,

and we calculate that the DELTA of each of our options has now increased to

0.60. What is the total DELTA of our position now? For every dollar change

in futures contracts, how much will the value of our options position now

change?

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.

continue to increase? What is the maximum value it can reach?

any option will be 1.0. This occurs when the option is way in-the-money, that

is when D. Mark prices far exceed the STRIKE PRICE of our options. The

maximum DELTA of our position would be three times 1.0, or 3.0. At this

point, every one-dollar change in the futures contract value would result in a

Delta Options Trading Course

own three futures contracts.

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