The first "Greek" that most people learn about when they get involved in options is Delta. This important measure tells us how much the price of the option will change if the underlying stock or ETF changes by $1.00.
If you own a call option that carries a delta of 50, that means that if the stock goes up by $1.00, your option will increase in value by $.50 (if the stock falls by $1.00, your option will fall by a little less than $.50).
The useful way to think about delta is to consider it the probability of that option finishing up (on expiration day) in the money. If you own a call option at a strike price of 60 and the underlying stock is selling at $60, you have an at-the-money option, and the delta will likely be about 50. In other words, the market is saying that your option has a 50-50 chance of expiring in the money (i.e., the stock is above $60 so your option would have some intrinsic value).
If your option were at the 55 strike, it would have a much higher delta value because the likelihood of its finishing up in the money (i.e., higher than $55) would be much higher. The stock could fall by $4.90 or go up by any amount and it would end up being in the money, so the delta value would be quite high, maybe 70 or 75. The market would be saying that there is a 70% or 75% chance of the stock ending up above $55 at expiration.
On the other hand, if your call option were at the 65 strike while the stock was selling at $60, it would carry a much lower delta because there would be a much lower likelihood of the stock going up $5 so that your option would expire in the money.
Of course, the amount of remaining life also has an effect on the delta value of an option. We will talk about that phenomenon next week.
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Terry
The bulls made a valiant effort this past week in hopes regain some of the losses over the past few weeks. The headlines might state that the market finished flat this past week, but the underlying theme was the bulls' strong push from the low hit Tuesday to the high hit only two days later. However, the 6.2% march upwards came with little conviction as market volume was lower than average.
Technically speaking, the market had moved into a short-term oversold state at the close last Friday, so I expected to see a short-term bounce play out. The bounce conveniently occurred off of the short-term oversold state and pushed the market back into a neutral state.
So, with no real edge going into next week, the probability of a short-term directional move is anyone's guess.
I will continue to watch the 1140 level of the S&P 500 as an area of potential overhead resistance. Although, I think I might broaden that a bit to a range of 1140-1170 as a top. As for support, I am watching for a breach of the May 6 "Flash Crash" lows. The level was tested on Friday (5/21) and again this past Tuesday, but the bulls were able to hold off both bearish attempts. In summary, the new range that I am following on the S&P 500 is 1140-1170 to 1040. Currently the S&P sits almost right in the middle of the range at 1089.41.
"Although consumers stalled in April, earlier strength and improving labor markets suggest they are merely down and not out," Guatieri said. Consumer spending is closely watched because it accounts for 70 percent of total economic activity. Personal incomes rose 0.4% - in line with expectations but not fast enough to help generate real growth.
"This should exacerbate the tremendous volatility we've seen in global stocks as the world wrestles with the idea of a debt-based collapse," said Chip Hanlon, president of Delta Global Advisors in Huntington Beach, California.
"Clearly, government handouts have had their desired effect: They juiced home sales and helped builders clear out even more inventory," said Michael D. Larson, an interest rate and housing analyst with Weiss Research. "We're also going to see yet another hangover in the coming couple of months due to the tax credit's expiration, with sales rates dropping off."
Again, are we headed for more doom and gloom? Who knows? Are we headed for more "pie in the sky"? Who knows? One thing is certain, when the market is uncertain and fear sets in, options premiums move higher and that is exactly what we have witnessed over the last few weeks. What does that mean? It means that options selling strategies historically reign supreme when fear moves into the market.
A range-bound market is typical during the summer months and as the market officially moves into summer next week I expect that we shall see history repeat itself. However, if I had to choose a side I would say that the bears could gain intermediate-term control and push the market lower over the next few months. Again, a sustained move below the "flash crash" level (1040 on the S&P) could spell trouble for the bulls.
Andy
I have been using your strategy on a number of issues including IWM, MOS, FCX. FCX (Freeport McMoran) has performed beautifully. That is today I can sell my FCX leaps and buy back my short calls and realize a net dollar amount of $9120. That $9120 added to the $3609 I have already received gives me a 50% (or so) profit in just 4 months or about 150% annually.
– Walter