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Picking The Right Delta For Your Option Trades — Transcript · YTtoTranscript

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Picking The Right Delta For Your Option Trades

dtoptions · 2,357 words · 12 min read · EN-ORIG

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Below is the complete, readable transcript of Picking The Right Delta For Your Option Trades by dtoptions on YouTube. Read the full text, copy any part you need, or generate a transcript for any video with our free tool.

So, let's talk a little bit more about Delta. Delta is the most important of the [clears throat] option Greeks. You have to know how Delta works if you want to be a successful options trader. You need to know the Delta of every single option you buy and sell. You need to know the total Delta of your option

positions. You need to monitor the Delta of an existing option position because the Delta will change over the life of that trade. And as the Deltas increase or decrease, that could be good for the position or bad for the position. So, Delta really tells you whether the position's working or not working. So,

this is again, it's the most important thing you need to know as an options trader, Delta. The first thing we need to talk about is how to pick a starting Delta. When I go, for example, sell a put, what Delta do I choose? What's the best Delta? I often get this question. What's the best Delta when going and

selling a put? And the answer to what's the best Delta on any trade is there's no best Delta. Delta just tells you the size of the position, the risk of the position, the percentages on the position as far as your probability of winning on the trade. That's all Delta does. There's no right or wrong Delta.

Delta is very linear, right? So, if I go into the options platform here, of course I use tastytrade, and let me pull up I'll pull up Apple. I don't have an Apple position right now. And let's go to the options chain for Apple. So, and I'm going to go uh for me, when I sell

puts, I like to go about 60 days out. So, I'm going to go to the June monthly cycle, the 52 DTE cycle. And when I sell a put, I typically go somewhere between 15 and 20 Deltas. Why? Because that's just where I like to hang out. For example, I may sell this 16 Delta put.

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I'm going to get a 282 credit on a buying power reduction of $2,600. Now again, there's no reason I couldn't sell a 20 delta put, a 25 delta put, a 31 delta put. You know, why did I choose the 16 delta put? Because remember, this just tells me the risk I'm taking on the

trade. So, a 16 delta put at at the start of the position is very similar to if I bought 16 shares of Apple. So, that's one thing to consider. Is that a big trade for you, right? Or if it's a small trade for you. If you want to take a little more risk, you

know, bump it up to maybe the 31 delta. That's like I'm starting with a position size equivalent to 31 shares of Apple. Essentially, you know, I went from 16 deltas to 31 deltas. You know, I doubled my delta, right? I doubled my directional risk on the trade, taking my 16 long deltas up to 31 long deltas. The

buying power on the trade goes up dramatically because there's more risk on a 31 delta put rather than the 16 delta put. I get a bigger credit, of course. I get $6 of credit, but the buying power goes up $4,100. But, you know, there's no wrong or right answer on the trade. The pop on the trades are

different. Why I like 15 to 20 deltas because that's going to give you a very high probability of profit. I like winning on 80% of my trades or more. So, 80% around the 20 delta. You know, if I stick to that 15 to 20 delta range, that's going to be 80 to 85% and that's

exactly what I get. I get a pop of 85% by selling the 16 delta put. If I go back to the 31 delta put, there's nothing wrong with this. You get a bigger credit. You have to take a little more buying power effect on it, but but the pop goes down. It goes down from 85%

down to 72%, which is still really high probability. 72% pop is a good pop. There's nothing wrong with that trade for me. I like not having to manage so many trades as far as losing positions. So, I I getting a little further out where I get tested a little less often, but there's many people that do love

being more aggressive on their puts. They'll sell a 30 delta put, 35 delta put, 45 delta, you know, whatever it happens to be, and that's fine. There's no right or wrong answer. You just need to pick the delta that makes sense for you as far as your comfort level, you know, what kind of probability of profit

do you want on the trade? Pick the delta for that. One thing to be careful of is I never want to sell puts that really low delta. Anything that's 10 deltas and below, I would be very worried about cuz once you get into single digit deltas like a seven delta put, a five delta

put, you're receiving very little credit. Uh the buying power does go down a little bit, but in this case this five delta put in Apple, I get a 85 cent credit on a buying power reduction of $2,100. That is a lot of buying power tied up for not a very big reward at all. Yeah,

you have a high pop, 97% pop on this trade, but still 97% is not 100%. Three times out of 100, you will be tested on this a little bit, and you could lose substantially. What if Apple crashes in a big way? What if Apple crashes, I don't know, 30, 40%? Maybe there's a

earnings event over the life of this trade and it crashes down hard. You could lose hundreds, maybe even thousands of dollars on this put cuz there is always that kind of risk when you sell a naked option. But, you know, if I'm selling a 31 delta put, at least I'm getting a nice credit. Even if I'm

selling a 16 delta put, I'm still getting paid quite a bit, you know, and I don't mind taking some risk as long as I'm getting paid to take the risk. If you're selling a five delta put, you're taking still substantial risk, and you're not really getting paid to take that risk. So, I would be very careful

anytime you're trying to sell a put that is 10 deltas or or are lower, then chances are uh you need to come up. You need to come up quite a bit. You know, I I like 20 deltas is a great starter kind of delta range. Start with that and see how you like it as far as, you know, the the

probability of profit and the number of trades that you get tested on. You're never going to win on 100% of your trades, so get that out of your thinking. You're going to be tested on some of your trades. For me, I just like being tested on about one in five, so that's why that 20 delta mark is

comfortable for me. Now, the next thing people often ask is, "How do you adjust the deltas of a position?" Let's imagine I start a trade here in Apple. I sell a 16 delta put in Apple at 52 DTE. And let's say a week goes by. And Apple comes down in a big way. Maybe there's a

news event, a earnings event, something happened, and Apple comes way down. And my 16 delta put now Apple has fallen to where my 16 delta put is now a 45 delta put. Now, what just happened? Well, remember, delta is directional risk. You know, my 16 delta put was like I'm long 16 shares

of Apple. And a 45 delta put is now like I'm long 45 shares of Apple. That is almost three times more long deltas, three times more directional risk on the trade, you know, now that it's went from 16 deltas to 45 deltas. That's a big deal. You need to do something about these deltas at that

point. When you go from like a 16 delta put to a 45 delta put, certainly once you get 50 or more, you're in the money, and you need to defend the trade. How would you defend the trade? Well, for example, in in this example here where the put becomes 45 deltas and I

originally started life at 16 deltas, I want to get that delta number back down to something much more like the starting position. How would you do that? Well, you sell a call against it. So, if I want to bring 45 deltas back down to somewhere in that 15 to 20 delta range. Also, well, let's sell the 28 delta call

and let's see what that brings our deltas down to. It brings my deltas down to 17. So, I reduced my 45 long deltas down to 17 long deltas by adding 28 short deltas by selling the call. That's how you do it, right? Delta tells you the directional risk on the trade, tells you how long or short you are on the

trade, and as long as you know the deltas, the the range you want to be in, it's very easy to constantly adjust the trade if you need to, if you need to defend the trade, to get your deltas back in check. Now, I know some people are going to want uh hard fast rules on, "Hey, this is always

the delta that I do a short put at. This is always the delta that I do a short strangle at. This is always the delta I do uh uh credit spread at. This is always the delta that I do a iron condor at." And if you want just my personal rules, I don't mind giving them, but

again, these are not You know, there's no right or wrong delta on any of this, and you will chances are you'll adjust these uh further in the money, further out of the money as you find your own trading style, but here's my personal rules. If I'm selling a naked put, we've already discussed this, 15 to 20 delta,

somewhere in the 15 to 20 delta range. So, in this case, you know, the 17 delta put would be pretty comfy for me. The 21 delta um pretty close as well. You know, I would sell one of these puts because that fits the probability of profit. Remember, I want to win on about 80 to

85% of my trades. So, that is what I need to do on a short put. Short call, same thing. If I do a short call, it's going to be the 17 delta short call, right? I'm going to win 84% of the time. So, that is my short naked put, short naked call is that 15 to 20 delta range.

Now, let's talk about credit spreads. For credit spreads, you got to bring them in a little bit to get a decent risk versus reward. Typically, I like selling around the 35 Delta and then going $5 wide as an example. Let's do the 32 Delta and go $5 wide. I want to risk no more than three to make one. And

in this case, doing the 32 Delta short put and going $5 wide, yeah, I get 130 credit versus 370 is the max loss $5 wide spread minus the 130 credit equals the 370 max loss. And if I'm if my rule is I never want to risk more than three to make one, then my credit as a minimum

has to be 125. I ideally I would like it more than 125, but I want at least 125. If it's not at least 125, I don't take the trade. In this case, I got 135. It meets my criteria. Same thing with the call credit spread. Somewhere around the 35 Delta, we'll go $5 wide. Do I get at

least 125? I do. I'll take the trade. Now, for iron condors, which is a combination of a call credit spread and a put credit spread, I still want that same three to one ratio. But here's the thing, I don't have to go in to 35 Deltas on each side for an iron condor

because I'm doing both the put credit spread and the call credit spread. So, you can get them further out. So, typically on iron condors, I sell somewhere around the 20 Delta option on each side. So, let's do the 21 Delta uh put and let's do the spread here. I'll buy the $5 wide spread. And if I want

somewhere around 125 to 150 credits, kind of what I want. I want around 70 cents on each side of the trade. In this case, I got 82 cents on the put credit spread side. Great. And then on the call credit spread side, I'd like to receive another 60, 70, 80 cents. I'll go the 17

Delta call, buy $5 wide. Yeah, overall I get a 146 credit. I'm risking 354 to make 148. It's exactly in my ballpark. So, that's my iron condor. So, there you go. My Deltas, right? For short naked options, 15 to 20 Deltas. For credit spreads, I sell somewhere around the 35 delta and then buy the long leg. For

iron condors, I sell around the 20 delta strangle and then buy the long legs. And again, that just fits my criteria as far as what I want for risk reward and what I like as probability of profit on my trades. There is no right or wrong answer. You do you. You find what works

for your trading style and best of luck in your trading. All right, guys. Peace.