Options Trading Blog


Tuesday, June 20, 2017

Delta is Multiplied

As an option trader, there are quite a few areas to learn and master before being able to extract money from the market on a regular basis. If you are in Group Coaching, you know how I feel about learning the option greeks. I give you quizzes on them to make you a better and more knowledgable option trader. Learning what the option greeks mean and how they function alone and in relation to the other greeks is very important as an option trader. Here we will take a look at one of the greeks and consider what many option traders often fail to consider.

Option Delta

Delta is probably the first greek an option trader learns and is focused on. In fact it can be a critical starting point when learning to trade options. Simply said, delta measures how much the theoretical value of an option will change if the stock moves up or down by $1. A positive delta means the position will rise in value if the stock rises and drop in value of the stock declines. A negative delta means the opposite. The value of the position will rise if the stock declines and drop in value if the stock rises in price. Some traders use delta as an estimate of the likelihood of an option expiring in-the-money (ITM). Though this is common practice, it is not a mathematically accurate representation.

The delta of a single call can range anywhere from 0 to 1.00 and the delta of a single put can range from 0 to -1.00. Generally at-the-money (ATM) options have a delta close to 0.50 for a long call and -0.50 for a long put. If a long call has a delta of 0.50 and the underlying stock moves higher by a dollar, the option premium should increase by $0.50. As you might have derived, long calls have a positive delta and long puts have a negative delta. Just the opposite is true with short options—a short call has a negative delta and a short put has a positive delta. The closer the option’s delta is to 1.00 or -1.00 the more it responds closer to the movement of the stock. Stock has a delta of 1.00 for a long position and -1.00 for a short position.

Taking the above paragraph into context, one may be able to derive that the delta of an option depends a great deal on the price of the stock relative to the strike price of the option. All other factors being held constant, when the stock price changes, the delta changes too.

AAPL Example

What many traders fail to understand is that delta is cumulative. A trader can add, subtract and multiply deltas to calculate the delta of the overall position including stock. The overall position delta is a great way to determine the risk/reward of the position. Let’s take a look at a couple of examples.

Let’s say a trader has a bullish outlook on Apple Inc. (AAPL) when the stock was trading at $145 and purchases 3 August 145 call options. Each call contract has a delta of +0.53. The total delta of the position would then be +1.59 (3 X 0.53) and not just 0.53. For every dollar AAPL rises all factors being held constant again, the position should profit $159 (100 X 1 X 1.59). If AAPL falls $2, the position should lose around $318 (100 X -2 X 1.59) based on the delta alone.

Using AAPL once again as the example, lets say a trader decides to purchase a October 145/150 bull call spread instead of the long calls. The delta of the long $145 call is once again 0.53 and the delta of the short $150 call is -0.37. The overall delta of the position is 0.16 (0.53 - 0.37). If AAPL moves higher by $3, the position will now gain $48 (100 X 3 X 0.16) with all factors being held constant again. If AAPL falls a dollar, the position will suffer a $16 (100 X -1 X 0.16) loss based on the delta alone.

Last Thought

Calculating the position delta is critical for understanding the potential risk/reward of a trader’s position and also of his or her total portfolio as well. If a trader’s portfolio delta is large (positive or negative), then the overall market performance will have a strong impact on the traders profit or loss.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring Inc.

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Thursday, June 15, 2017

Define Value and Define Risk

For traders, risk is one of the hardest things to define after entering a trade. Risk is a change in momentum. If a short position is taken due to negative momentum, that trade should be held until momentum turns positive. Conversely, a long position should work until momentum turns negative.

To define risk, we must first determine a fair value area. A value area is a market profile term that includes approximately 70% of total volume (one-standard deviation) around the mean or high-volume price.

The 30-minute bar chart for gold shows daily value areas. The daily value areas are constructed during regular trading hours which is also the high volume or most liquid time of day. Generally, if a price trades in more than four 30-minute periods during regular trading hours, it is considered part of the value area. Note that the top and bottom of each shaded box has been visited at least 4 times during the trading day. 

Once a direction has been established, a value area can be used to define risk.  For example, in the gold chart the top of value is used to determine risk in a falling market. By using this method, a trader may lock in profits each day using a trailing stop or another exit. The trade is exited when an objective is met or the top of value is violated. On the other hand, the soybean meal chart shows how to trail a stop using the bottom of value area in a rising market.

This method of defining risk is useful for day to swing type trades. When momentum or direction becomes clear, value areas can reduce risk and protect profit.

John Seguin

Senior Futures Instructor

Market Taker Mentoring Inc.



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Wednesday, June 7, 2017

Using a Butterfly to Lock in Profits

Here is a topic I have talked recently and quite frequently with several of my one-on-one students; locking in profits with an adjustment. There are several ways to make adjustments or lock in profits on a profitable long call or long put position. One of my favorites has to be converting the option position to a long butterfly spread. It may sound funny, but probably the hardest part about an option trader converting his position to lock in profits with a butterfly spread is getting to a profitable position in the first place; the rest is relatively easy! Let’s take a look at a scenario and an outlook in which this butterfly spread can be considered.

Butterfly Spread on AAPL

Let’s assume an option trader has been watching Apple Inc. (AAPL) stock and noticed the stock pulled back slightly from the uptrend in which it has been trading in the middle of May. When Apple stock was trading around $150, he decides to buy the June 150 call options for 3. Lo and behold the stock moved higher over the last couple of weeks and is trading close to the $155 area. The $185 level is potential resistance for the stock because it has previously traded to that area twice before and the trader is concerned it might happen once again. The trader thinks there may be a chance that AAPL may trade sideways at that level. Converting a long call position to a butterfly spread is advantageous if a neutral outlook is forecast (as in this case). A long butterfly spread has its maximum profit attained if the stock is trading at the short strikes (body of the butterfly) at expiration.

The option trader is already long the June 150 call which constitutes one wing of the butterfly so he needs to sell two June 155 calls which is the body of the butterfly and where the option trader thinks the stock may trade until expiration. The $155 level represents where the maximum profit can be earned at expiration. A June 160 call (other wing) would need to be purchased to complete the long call butterfly spread.

The original cost of the June 150 call was 3. The two short June 155 calls sell for 2 (rounded for ease) apiece and the long June 160 call costs 0.50. The converted 150/155/160 long call butterfly spread produces a credit of 0.50 (-3 + 4 (2 X 2) – 0.50). Now here’s a look at the possible scenarios that could happen and some possibilities that can be considered.

Take Profit

With AAPL trading around $155, the June 150 call option has increased in value to 6. That means the trader can sell the call and make a profit of $3 (6 - 3). Certainly, this is a viable option and should be considered on some of the contracts before adjusting the position.

Maximum Loss

Maximum loss for a long butterfly spread is realized if the stock is trading at or below the lowest strike (lower wing) or at or above the highest strike (higher wing). In this case the maximum loss is not a loss at all but a credit of $0.50. In essence, the original $3 potential risk from buying the June 150 call is now erased and has turned into a guaranteed profit even if AAPL completely collapses. If the stock continues to move higher and past the 160 strike at expiration, the maximum loss is still achieved; albeit a $0.50 profit. But more could have been made by simply keeping the original position intact. That is why it may be prudent if there is more than one contract (long call) to maybe not convert all the positions to a butterfly spread, particularity if the trader thinks that the stock can still climb higher. Keeping the long call would have more profitable if this scenario played out.

Maximum Profit

Maximum profit is achieved if the trader is right and stock closes right at $155 at expiration. The current profit on the trade is $3 as discussed above. If Apple stock continues to trade sideways or ends up at $155 at expiration, that $3 profit has now grown to an $5.50 profit. The maximum profit for a butterfly spread is derived from taking the difference between the bought and sold strikes which in this case is $5, and adding premium received from converting the position to a butterfly spread ($0.50). Not too bad of a result if the stock trades sideways or ends up at $155 at expiration. It seems pretty clear that the long butterfly spread is very beneficial when a sideways outlook is forecast after the long option has profited.

As long as the strike prices align with the trader’s outlook, converting a long call or a long put to a butterfly spread can be very effective after gains are realized. If there are multiple contracts, it allows an option trader to take profits now and also potentially earn more if the stock essentially goes nowhere and ends up close to the short strikes at expiration.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring Inc.

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Thursday, June 1, 2017

Sprints Initiate Trends

Every trader’s dream is to catch a trend early and ride it to the end. It is a tough task and nearly impossible to sell the absolute high or buy the absolute low. However, there are short-term patterns that frequently precede trends. Patterns of consolidation are probable just before trends and sprints are frequent when trends begin.

A ‘sprint’ occurs when a market rapidly leaves a fair value area. SPRINT is short for single prints. Single prints define a series of low volume prices left behind as a market rises or declines. To get a visual of sprints refer to the crude oil 30-minute bar charts.

The different color boxes within the charts display the fair value area during regular trading hours. Regular trading hours are the most liquid or high-volume time of day. A ‘value area’ captures approximately 70% of the days total volume or roughly 1 standard deviation. When consecutive value areas overlap, odds increase for a vertical move or sprint away from fair value.

In chart 1 note that after 3 sessions of sideways trades (overlapping value) a sprint lower occurred about mid-session Monday 4/17. That single bar is a sprint and was the onset of a trend lower. And once a market begins to trend there many days with sprints as the market accelerates in a direction, in this case lower. Sometimes, markets forecast when a market is ripe to trend. More often trends begin after a few days of below average ranges with overlapping value areas. So, to increase the odds of catching a trend early, search for markets that are wound a bit too tight. 

In chart 2 note the trend higher began with a sprint higher on Monday 3/27. That day was followed by a few more days with sprints as the market accelerated higher. Also, that trend resumed after a few sessions of sideways trade (3/30-4/3).  Markets rest and run or consolidate and trend. This short-term pattern of about 72 hours of consolidation may be an alert to prepare for a breakout and recognizing a sprint should enhance your timing to catch a trend early.

John Seguin

Senior Futures Instructor

Market Taker Mentoring

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Thursday, May 25, 2017

Considering ITM Put Options?

There is always potential for the market or individual stocks to move lower despite this incredible bullish run over the last several months. In fact, many traders never even think about bearish strategies because they are always looking for bullish options. Option traders know that stocks and markets do not always go up, but many will wait until they think the decline is over to once again look for a bullish strategy instead of taking advantage of bearish opportunity at hand. Understanding put options is a must for option traders but I am often asked how to choose strike prices. There are several different options to consider and here are a few things to consider specifically based on an expected small move in the underlying. But first let us take break down the anatomy of a put option.

A buyer of a put option has the right, but not the obligation to sell shares of underlying stock at a certain price on or before an expiration day. The price at which the buyer can sell the shares is called the strike price. There are many strike prices and expirations to choose from which can be overwhelming for a trader. When expecting a stock to make a small move especially if the stock is lower in price, it may be advantageous for the trader to select an in-the-money (ITM) put option. An ITM put option is a put with a strike price that is higher than the stock’s current price. Before going further, here’s a look at a possible scenario where buying an ITM put might be warranted.

An ITM put option can be used to capture a relatively small move lower. Suppose an option trader is watching a $10 stock in a downtrend. The stock then rallies higher and now he thinks it is a good time to enter a bearish position with a put option. He surmises the stock might be able to drop about $0.50.

A critical point about capturing this potential $0.50 move down revolves around option delta. Option delta is the rate of change in the option’s value relative to the change in the stock price. Puts have a negative option delta because if the stock rises, puts will lose some of their value. Since puts give the owner the right to sell stock, puts gain value as the stock falls. In this example, the trader is expecting only a $0.50 move lower. Buying an ITM put that has a higher option delta will profit more than a put with a smaller option delta if the anticipated move comes to fruition.

With the stock trading just under $10, the option trader looks at the 10 and 12 strike puts. The 10 strike puts have an option delta of about -0.55 and the 12 strike puts have an option delta of about -0.90. This means that for every $1.00 the stock moves down, the 10 strike put’s premium should increase by $0.55 and the 12 strike put’s premium should increase by $0.90 all other factors held constant. The reverse is also true. If the stock moves higher by $1.00, each put would lose value in the amount of their deltas. Since the expected move is only $0.50, half the deltas would be gained or loss depending on the direction of the stock.

Final Thoughts…

Buying an ITM put option is not always the best way to capture a stock’s move lower, but when it comes to profiting on a perceived small move, an option trader should consider a put option position with a higher option delta and do so with the satisfaction of knowing their loss potential is limited to the cost of the put option.

Happy Memorial Day!

John Kmiecik

Senior Options Instructor

Market Taker Mentoring Inc.

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Thursday, May 18, 2017

An Options Watch List is a Must

If you are a NBA or NHL fan, you probably know that we are getting closer and closer to the finals. With only four teams left, the finals are near. The remaining teams are gathering information about themselves and their opponents and trying to gain the upper hand over them which ultimately could lead to a victory and a championship. Just like in option trading, a well though out and well kept watch list can help a trader in a variety of ways including scoring profits. First and foremost it can help keep track of the underlyings and keep them all in one place so it is easy to reference them. Potential trade opportunities are often discovered by scanning and searching charts and options from stocks that are on a watch list just like determining potential strengths and weaknesses of a hockey or basketball opponent. Here are a couple of ways a trader might go about building a watch list or creating a better one.

Familiar Ones

If a person is relatively new to trading there are probably a few stocks that he or she is familiar with. To gather more names to add to the list, a trader can scan through an index (like the S&P 500 for example) and find more stocks to potentially add to the list. Some of the stocks listed may not be conducive for a variety of reasons. It makes perfect sense to check out the symbols and see if the charts and the options are at acceptable levels for the trader’s personality and plan. Things a trader might want to consider when deciding whether to put a stock on his watch list are the stock price, the stock’s volatility, option prices, bid/ask spreads and option volume just to name a few. When this process is complete, a trader should have a decent watch list in which to work with. This list may grow and sometimes shrink over time depending on the trader.


There are numerous trading services (free and paid) out there that not only might introduce traders to stocks to add to the watch list which may lead to potential trade opportunities. The Market Taker Live Advantage Group Coaching is one such service that MTM offers. As mentioned above, the reason a watch list is created in the first place is to find potential trades. A service can not only introduce traders to new symbols but also provide trade ideas that can turnout to be profitable. But if the trade concept is unclear or deviates from a trader’s plan regardless of the source, it should be avoided until the concept is understood. In any case, if the trader thinks there may be an opportunity on the stock in the future it can be added the list.

List Categories

Once a trader has a watch list of stocks, it may be prudent to separate the list into different categories. There can be a list for stocks that are ready to trade now or very soon. Keeping this list the shortest might make sense for a couple of reasons. First a trader should probably not be trading more stocks than he or she can handle and secondly if there are too many on this list, some trade ideas might get lost in the mix. A short list makes it easier to monitor potential trade opportunities. There can also be a category for stocks that have trade potential in the near future (a day to a week for example). This list can be monitored maybe a little less frequently than the previous list. Another category to consider for the watch list are stocks that have no potential now but may in the future. For example, maybe a stock is trading in the middle of a channel and if it ever trades down to support a bullish opportunity may arise. Stocks should be moved up and down in these different categories as needed.

What’s Important

These were just a few ideas about how a trader can go about developing and monitoring a watch list and searching for potential trade opportunities. The most important part about having a watch list is not how it was acquired but that there is one. A well-refined and updated watch list can yield plenty of potential money making opportunities in option trading.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

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