Chris Rowe

Turn Your Deltas Into Dollars

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For example, I had taken some bearish positions recently because just about every sign the market gave us said it was going to trade much lower. But even if there was a 90% chance of that happening, of course, there would still be a 10% chance of it not happening.

In other words, it was a good thing we owned the right options -- that is, the options that would have gained a lot more if the market moved down as I thought, than they lost when the market went in the other direction (up).

The Way to Turn Your Deltas Into Dollars

Now the market has started to move up again, and you're going to start to profit from bullish positions.

What you want to do is this: Instead of buying stocks or exchange-traded funds (ETFs) outright, buy deep-in-the-money call options on the strongest stocks or ETFs. (Learn how to find the best ETFs to trade.)

You want to position yourself so that if the stock moves up several points, 85%-90% of that gain will be reflected in the price of your call option. But if it moves down several points, you only want more like 50% or 60% of the loss reflected in your option.

How do we do this?

When I buy a call option or a put option to open a trade (which is the most basic form of options trading), I usually buy an option that is anywhere from being two to five series in-the-money. That is, from the current market price of the stock, I will examine the call options that are two to five strikes below the market price, and the puts that are anywhere from two to five strikes above the market price of the stock.

This rule of thumb varies, depending on how high or volatile the stock's price is, and, therefore, how much time value the option on the stock has. Usually the option that I buy will have a delta of about 0.75 to 0.80.