1. Delta is your position compass
Delta is one of the Greek letters of options, which is used to measure the sensitivity of option prices to changes in the price of the underlying asset. Specifically, Delta represents the expected change in option prices when the price of the underlying asset changes by 1 unit.
At 2 a.m. in the New York trading room, Zhang stared at the Delta value of Tesla options. The Delta of the call option he just bought was 0.6, which means that for every $1 increase in Tesla's stock price, the option earns $0.6. As a result, the next day Musk tweeted announcing the new factory, the stock price jumped $15, and Zhang's account instantly increased by $9,000. Delta is like the speedometer in a car, telling you which direction you are driving and how hard you are pressing the accelerator.
Bitcoin option players regard Delta as their lifeblood. On the night of LUNA's collapse, the Delta of a miner's put option surged to -0.9, which means that for every $1,000 drop in the price of the currency, he earned $900. When Bitcoin fell from 30,000 to 20,000, his Delta soared from -0.3 to -0.95, and the money he earned when he finally closed his position was enough to buy 20 of the latest mining machines. He said: "Delta is like a seismograph. The more violent the market is, the crazier the number jumps."
2. Delta's 72 Transformations
Scenario 1: "Experienced Driver Mode" of In-the-Money Options When Tesla's stock price was $200, the Delta of a call option with an exercise price of $180 was about 0.8. This is like driving a luxury car on autopilot - when the stock price rises by 1%, the option price rises by 0.8%, making steady profits. During the earnings season, some people used this feature to ambush deep in-the-money calls, eating up a 12% increase in two days, which is more exciting than stock trading.
Scenario 2: "Bicycle Drift" of Out-of-the-Money Options When Bitcoin was trading sideways at 60,000, the Delta of a call option with an exercise price of 65,000 was only 0.2. This is like riding a bicycle uphill - you have to pedal hard (the price of the currency soars) to move forward. A trader bet on 65,000 Calls, but Bitcoin surged to 64,800 and then fell back. The Delta jumped back and forth between 0.18 and 0.35, and the option eventually returned to zero.
Scenario 3: Delta hedging's "Great Move" A Wall Street fund has a unique skill: long Tesla stock and buy put options with the same amount of Delta. When the stock price rises, the stock makes money, the options lose money, but the Delta offsets it (the stock will make a profit if it rises sharply); when the stock price falls, the options make money, the stock loses money, but the Delta hedges. Last year, Tesla was volatile throughout the year, and they made a net profit of 15% with this insurance strategy, which made their peers envious.
3. Delta’s fatal attraction
In the 2021 GameStop short squeeze, a Reddit retail investor's account had a terrifying scene: the Delta of the deeply out-of-the-money call option he bought was only 0.05, but when the stock price soared, the Delta soared to 0.9. He originally only intended to make some pocket money, but the floating profit of millions of dollars scared him so much that he closed his position. Later, the stock price continued to double, and the money he lost was enough to buy a villa.
The Bitcoin market is even more dangerous. A miner used a Delta neutral strategy to make markets, thinking he had perfect hedging. As a result, the Ethereum upgrade triggered an earthquake in the cryptocurrency circle, and the Delta of Bitcoin and related currencies had a chain reaction. His hedging coefficient was completely messed up, and his loss in a single day was equivalent to half a year's income. Now there is a big poster in his office: "Delta will lie, especially when the market goes crazy."
4. Delta’s Practical Combat Strategy
Wang, the US stock investor, has a set of "Delta syllogism":
Position building period (Delta 0.3-0.5) : Like a novice driver on the road, leave enough room for adjustment
The period of increasing positions (Delta 0.6-0.7) : Like high-speed cruising, keep a close eye on the risks ahead
Harvest period (Delta > 0.8) : Like driving in a rainstorm, be ready to brake at any time
Cryptocurrency experts have invented the "Delta Thermometer" strategy:
When Bitcoin is sideways: Keeping the absolute value of Delta < 0.3 is like wearing a down jacket and drinking an ice drink - you are not afraid of cold or heat
When breaking through the key position: let Delta rush to 0.6-0.8, like a sprinter starting at the moment
When the Black Swan strikes: Reverse Delta hedging, put bulletproof vests on your account
Before the Fed raised interest rates, a team adjusted the Delta of their Bitcoin positions to -0.2 and held a small number of call options. As a result, after the rate hike, the price of the currency fell first and then rose. They used negative Delta to withstand the decline and relied on call options to take advantage of the rebound, winning both sides.
6. Delta Survival Law
Don’t turn the steering wheel too far . The total Delta of the option portfolio position should be controlled within 20% of the account’s net value.
Always check the rearview mirror . Recalculate Delta every 5% increase or decrease, just like a driver checking the dashboard every half hour.
Prepare brake pads . When Delta suddenly changes by more than 20%, hedge or reduce positions immediately.
A trader who survived three liquidations said: "I used to regard Delta as the Holy Grail, but now I regard it as a guide - I use it as a reference, but I trust my own eyes more."
7. Next Issue Preview
Tomorrow we will unlock "Gamma of Option Greek Letters"
After-class tasks :
Use the option calculator to observe the Delta curve of Tesla with different strike prices
Find two Bitcoin options with different expiration dates on Deribit and compare their Delta change speeds
Leave a message to share your thrilling stories of being cheated or saved by Delta
