Delta Across Time and Asset Classes

Examples on why use Delta to examine dissimilar options strategies

In Part I we looked at DELTA as one of the most flexible and useful greek for Options Traders: Why We Love Delta. You Should Too.

Delta can be used to compare Options strategies across different underlyings and different time periods.

Delta in SPY vs TSLA

So lets looks at some examples

One PUT Contract on SPY @ 276

The figure shows a short PUT contract. The strike price is $276 and the SPY as of August 22, was $286. The expiration for this particular contract is Sep, 21st. thus 30 days to expiration.

The width of the strike is $10, the Put is $10 Out of the money (OTM), that is 3.5%. So SPY price would have to go down by 3.5% for this PUT to get tested. In summary:

  • SPY
  • 30 DTE
  • Short PUT @ 276
  • $10 OTM or 3.5%

Lets compare with a position in Tesla (TSLA).

One PUT Contract on TSLA @ 265

This time we have:

  • August 22, 2018
  • TSLA
  • 30 DTE
  • Short PUT @ 265
  • $55 OTM or 17%

So when you compare both positions, we see the TSLA price would have to drop 17% for the PUT to get tested. That vs a “mere” 3.5% in SPY.

What is the probability of each of these PUTS to get tested? How do we assess that? Well, yes you guessed it, we look at the Deltas.

Both these PUTS were at 16 Delta

In other words, the market is telling you that the expected probability is the same for boths contracts. Boths contract have around 16% chance of being tested at expiration. Even is the absolute movement of the stock $10 vs $55 are far from similar. Common sense is telling you that the implied volatility in these prices is much higher for TSLA than for the SPY.[But Volatility is another issue all together]

SPY vs SPY in 2007

Let’s go back to 2007:

One PUT Contract on SPY @ 138
  • January 18, 2007
  • SPY
  • 30 DTE
  • Short PUT @ 138
  • $5 OTM or 3%
  • 16 Delta

In 2007, the SPY was at 143. How do this position compares to the 2018 one on SPY? Well again we look at the Deltas. The $138 is at 16 Delta.

You did notice that both OTM amount were around 3%. So why we don’t use that as an indicator of our positions and forget Delta? Well the reason is that you get only part of the story.

And Then Came 2008!

A few months after that:

One PUT Contract on SPY @ 74
  • October 23, 2008
  • SPY
  • 30 DTE
  • Short PUT @ 74
  • $16 OTM or 17%
  • 16 Delta

The price is now down to $90! And the PUT we chose is $16 lower. That is 17% !

If we would have used the percentage rule for setting up that strategy, you sold a PUT at a strike 3% lower that the price of the SPY at that moment.

That is a higher risk, lower probability position. Maybe at 40 Delta, so with 60% chances of being profitable vs. the 84% chances initially you intended to trade. A substantially different trade.

So as you can see, looking at strategies in terms of Delta, makes the position agnostic to the underlying and to the period of time you are comparing. That is the reason that Delta are the main way to express a trade when conducting backtests.