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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Volatility reigned supreme this past week. The widely vacillating market was due to the continued rise in oil prices due to geopolitical concerns in the middle east and a better than anticipated employment report for the United States.
"They're tugging at each other, employment and oil," said Jack Ablin, chief investment officer of Harris Private Bank. "Oil is high enough that it has to be a concern. The longer it remains at this level the greater the chance that it upends our recovery."
The ongoing struggle in Libya sent crude oil to its highest level since September 2008 at $104.42 a barrel. Oil prices rallied 7.3% during the week. The rise in oil prices and the threat of inflation also helped fuel a rally in gold and silver. Both hit historic levels this past week.
The stock market has been running in place over the past few weeks as higher oil prices have threatened to undermine recent signs of a global economic recovery.
Higher energy prices have weighed on the market while favorable U.S. job market reports have had the opposite effect. On Friday, the Labor Department reported that the unemployment rate dipped to 8.9% in February from 9% in January. The rate has dropped for three months in a row and is now at its lowest level since April 2009. Private employers added 220,000 jobs in February, the fastest pace in almost a year.
The ISM service and manufacturing numbers also pleased the market as the they hit 59.7 and 61.4, respectively. It was a multi-year high in the ISM manufacturing index and the highest number in over 6 years in the service index.
However, the bears nor the bulls were able to make any ground this week as the market ultimately ended the week flat. The Dow, S&P and Nasdaq gained a paltry 0.3%, 0.1% and 0.1, respectively.
As for the technical side of things we do not have any short-term technical extremes in the market. All of major indexes are currently in a neutral state. Also, the gap in the major market benchmark S&P 500 (SPY) Thursday closed Friday.
IT should be noted that when we see a rally the day before an employment report and a negative on the day of the report the market was negative over the next 1-5 days. This type of price action has happened 15 times in the S&P and 11 of those occurrences led to a bearish average return of -0.7% over the next week.
Oil prices will remain at the forefront until the struggle in Libya is under control. Until then the market will most likely struggle to sustain any short-term gains. If the struggle continues and spreads to other countries throughout the middle east we could see the short-term reprieve quickly turn into an intermediate one. There are still quite a few gaps that have yet to close in the S&P with the closest occurring back in the beginning of February. A decline to that level would cause SPY to slip to $128.78.
Andy
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