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Hard Deltas and Parity - Options Mastery Series Lesson 22

Filed Under Options Mastery Series 

Hard Deltas and Parity
 
According to Options University founder Ron Ianieri, “when we’re looking at an in-the-money option, you have to think about hard Delta”. What does “hard Delta” mean?
 
In-the-money options that have a higher Delta (above 90) are called “hard Delta”. Keep in mind that although an option may be in-the-money, it doesn’t mean that the option’s Delta must be at 100. An option can be ITM and have a Delta in the 60s. By definition, when an option contract has a hard Delta of 100 that means the option’s movements will exactly match those of the underlying stock. It follows that lower Deltas are also referred to as “softer” Deltas. Because an ITM option with a hard Delta acts very much like the underlying stock, hard Delta is much less influenced by external events than options with soft Delta.
 
One of the advantages of options is that if the option is allowed to expire, the maximum loss is the premium. This is important in that inexperienced option traders might panic when they see the option price move away from them and lose more money by closing out the position rather than just let the option expire! This is a common mistake in rookie traders along with an equally disastrous mistake of not closing out in-the-money positions before expiration.
 
Another rookie error is forgetting to figure out the breakeven for the position; you need to always consider the premium costs in relation to the breakeven for the trade.
 
For example, if you buy a $40 call option for a $2 premium (per share), you would need the stock price to move up to $42 before the option starts to produce a profit. This breakeven stock price is called Parity, which is the same thing as breakeven. Every time a trader buys an option they will need to consider parity (breakeven) before a trade can be considered a gain; an option really becomes in-the-money after parity.. On the other hand, when selling an option below Parity, the option becomes a loser.

Insert figs 22-2 and 22-2

For more on all aspects of stock options, go to www.optionsuniversity.com

 

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