The Deltas on My February Contracts

I’ve written about it before – delta – the option Greek that provides insight on the potential change in the option price based on volatility of the underlying stock.  More sophisticated traders than I am use it as part of their trade calculations, especially those who work on the put side of the charts.  It enters the calculations a little less often on the call side, which is most of the trades I do.

The actually meaning of the statistic is that in the case of delta valued at 1.00, a $1 move in the stock price will result in a $1.00 move in the price of the option.  These high values are most often seen when an option is in the money – the stock price is trading above the option strike price.   By the way, for puts, the delta moves inversely to the stock price (i.e., when the stock price goes up, the value of the put decreases).

As my experience in trading options grows, I may come to terms with delta and the other Greeks beyond my very rudimentary understanding of them so far.   One insight I have found with delta is it is useful to predict the likelihood of a stock being called away at expiration day (or at ex-dividend date, if that occurs within the month of expiration).  The higher the delta is, as it approaches or equals 1.00, the more likely the stock is to be called.

Since this month is where all of my money is on the table in Rescue My IRA, I don’t have a lot to write about on the blog and I thought I might put a post up about the four February contracts I have in play just now:

• CSCO 21 Feb 2013, yesterday close $21.19, delta .54
• HAL 35 Feb 2013, yesterday close $40.31, delta .89
• LNC 26 Feb 2013, yesterday close $29.50, delta 1.00
• SWK 75 Feb 2013, yesterday close $77.31, delta .85

Each of these positions are in the money, some deeper than others.  The high delta values on the HAL, LNC, and SWK options suggest that they are very likely to be called next week on expiration day, while it more of a 50-50 proposition for the CSCO shares. 

One of the takeaways from this review – something I’ll need to look in further sometime – is why the delta for HAL is not 1.00 at this point, given that the shares are in the money for the 35 strike by more than $5.00.  Compare that with LNC in the examples above, the shares are only $3.50 in the money.  To dig into this question, I will probably need to take a look at the stock beta for some insight.

In closing, this analysis shows that it is very likely my calls will be assigned for HAL, LNC, and SWK, and less likely for CSCO.  The result of these trades will be stocks gains totaling $1,460.04 – February will be a very nice month, indeed.