The video below talks about all the Option Greeks. For simplicity sake I am going to discuss how I use the Greeks in my options investing. For now, I am keeping things simple and only using Delta. The textbook definition of Delta is a ratio that compares how an asset changes in relation to its corresponding derivative. In the case of stock options, Delta corresponds to how the option contract relates to the underlying stock or etf. For example, if an underlying stock option has a delta of .70 then a change of a dollar in the stock the option would rise by about .70 per share.
Another way to use Delta is to use it as a probability that the option contract will expire in the money. My goal in investing is to either expire worthless or be closed with a good profit. For instance, if you have an 80% of closing in the money then you will most likely have the shares assigned. Meaning if you are using a call the stocks will be sold to the owner of the contract. In the case of a put you would be assigned and would purchase the shares at the agreed upon strike price. My goal is to typically sell options and earn a premium on options where the contact only has around a 20% chance of closing in the money.
This can be confusing. Let us use an example to clarify this. In my October Review post I had an option contract on Proctor & Gamble (PG 11/6 150 C Delta @ .1850). This contract expires on November 6th at $150. If the price of PG goes over $150 anytime during the contract the stock could be assigned. I would then have to sell 100 shares of PG for $150. One thing to note is that 1 option contract is always for 100 shares. Also, most options typically are not assigned before expiration. It does happen but it is rare. When I sold this stock option the Delta was .1850. This means that the option has a 18.5% chance of expiring in the money or 81.5% probability of expiring out of the money. This investment did expire out of the money. However, I would have been ok if it is assigned. Since this is a covered call option, I already own the stock and when I sold the option it was trading at around $137. If I got $150 this is a 10% increase in the stock. Not a bad return for a short period of time. For a better explanation of how the Greeks work please watch the video below. Also, let me know if you have any questions or comments?
https://www.youtube.com/watch?v=GxmIvvROge4