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Tom Preston Says Delta Alone Won't Tell You the Better Trade
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ticker lesson
Breakdown
0:00lesson
Delta as probability proxy for options
- Delta used as proxy for probability of expiring worthless
- Delta 40 strike or 35 delta strike considered
- Delta 16 delta option generates less credit
- Delta 25 delta option has higher probability of profit
2:16lesson
Probability of in the money vs out of the money
- 700 put has 17% probability of being in the money
- 725 put has 25% probability of being in the money
- Probability of out of the money is 83% vs 75%
- Volatility must be considered before choosing delta
4:45lesson
Volatility and normal distribution impact
- Normal distribution assumed for stock returns
- 15% volatility leads to narrower distribution
- 30% volatility leads to flatter distribution
- Higher volatility pushes deltas further out of the money
7:44lesson
Volatility impact on put pricing
- 16 delta put at 15% volatility is 850 strike
- 25 delta put at 15% volatility is 900 strike
- 16 delta put at 30% volatility is 700 strike
- 25 delta put at 30% volatility is 800 strike
10:23lesson
Volatility and credit collection
- Low volatility leads to less credit when selling puts
- Higher volatility leads to more credit when selling puts
- 16 delta put at 15% volatility is worth 4 cents
- 25 delta put at 15% volatility is worth 69 cents
12:34lesson
Risk and reward trade-off with delta
- Both 16 delta and 25 delta puts lose money if stock drops
- 25 delta put gives more credit for risk
- Traders must decide if reduced credit is worth the trade
- Volatility and strike price impact credit and risk
14:40lesson
Delta and volatility theory summary
- Delta quantifies trade decision-making
- Volatility affects strike price and credit
- Traders must assess probability and credit
- No trade recommendation given
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