Wednesday, January 11, 2012
January Expirations - and Deltas
January 20 is options expiry this month, so I wanted to take a look at the January contracts to see which ones I can expect will be called. On another note, a recent discussion over on the Yahoo board touched on one of the “Greeks,” namely delta, defining it as the probability that an option will be assigned. The Greeks are statistical calculations, often provided by the market, that can be used to assist in developing trade strategies.
In their book Options for Volatile Markets (see the Amazon link over there to the right), Lehman and McMillan define delta as “the amount an option is expected to move for a one dollar move in the stock.” Thus, as the value of delta approaches 1.00 – meaning a one dollar move in the stock will produce an equal move in the option price – you have a pretty good idea that your in-the-money option is going to be exercised.
My strategy is not yet so sophisticated as to use delta, or any of the Greeks, for that matter, in trades…maybe someday it will be. Getting back to my post today, I will use it in the analysis that I present here.
Here’s a table of the six positions up for January expiration:
There are a couple of things to note about this analysis. First, my goal in the Rescue My IRA account is to earn 1 percent per month (in January, the goal is approximately $1,300) – the total here exceeds my goal, and is in addition to dividends and option premiums I’ll receive, so January’s looking like a good month. Second, each of the deltas are fairly high, approaching 1.00, or 100%. Thus, it’s highly likely these contracts will be assigned and I will earn these amounts – which, by the way, are estimated net of commissions.
Another point I would make today is the likelihood of the CAT contract being assigned early. Not only does the recent close far exceed the strike price on my contract, this stock goes ex-dividend on January 18.
And the last one, an issue I have mentioned before, is that the recent close price on these positions is higher than my strike price, meaning there is an opportunity cost I've given up by using the covered call strategy. I've come to terms with that - what I'm finding is that there is an intangible benefit to having a strategy and feeling like your contracts provide some assurance you'll meet your financial goals. And, as I noted above, I have certainly been able to do that for this month.
Finally, looks like I will have a substantial cash position to work with during the week after expiration. With the recent market gains, I’ll need to get to work on finding some prudent new investments.