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Position Delta and Ways to Manage It

Key Points
  • If your Position Delta is positive, and the underlying security moves higher, the value of your position should move higher. 

  • If your Position Delta is negative, and the underlying security moves lower, the value of your position should also move lower.

Many traders hold long or short positions in individual equities and simultaneously trade options ‘around’ those positions. In fact, one of the more common strategies I see is clients who hold an equity position with a short (covered) call and short put option on the same underlying, creating an options ‘package’’. I trade in a similar way and find it fascinating.  It's interesting to watch the impact of an earnings report or how one day of time decay impacts the total Position Delta.  But, some clients who trade this way find it difficult to evaluate the risk of their positions.  Let trading tools help you. 

Let’s start with the basics

First of all, what exactly is Delta?  Delta is a measure of how much an option’s price is expected to change with a corresponding $1.00 change in the price of the underlying stock, index or ETF. The Delta of a long call option ranges from 0.00 to +1.00, while a long put option has a Delta ranging from -1.00 to 0.00. For example, an at-the-money call option will usually have a Delta of approximately 0.50 which means that you can expect the value of the call option to initially increase or decrease by approximately $0.50 with a corresponding $1.00 move, higher or lower, in the underlying security.

Each share of a long equity has a Delta, of +1.00, while each share of short stock has a Delta of -1.00. For example, if you are long 100 shares of XYZ, your Position Delta is 100. This means if the price of XYZ goes up or down by $1.00, the value of your XYZ position will increase or decrease by $100. 

Remember: 

100 long shares of XYZ = Position Delta of 100

100 short shares of XYZ = Position Delta of -100

This seems pretty simple, right?   OK, let’s take it up a notch and walk through an example.

When you have multiple positions in the same underlying equity (either with multiple options or a combination of stock and options), the position Delta is obtained by adding up the (positive or negative) Deltas from the individual legs.

If you continue to hold 100 long shares of XYZ and two weeks prior to the next earnings report you decide to sell 1 covered call with a Delta of 0.25, can you guess what will happen to your total Position Delta?  It will be reduced by the Delta of the covered call (since you are selling the call).  The Position Delta of the short options contract is -25 (-.25 x 100 multiplier), so now your Position Delta is 75.

Long 100 shares of XYZ 100 Delta

Short 1 XYZ call contract - 25 Delta

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Total package:                   75 Delta

A Position Delta of 75 means that theoretically, the value of your XYZ position will change by $75 for every $1 move up or down in the underlying security.  

Let’s take this one step further and then review a few examples of how you can use this information to help manage risk or even generate income. 

Keeping with the example above, your total position in XYZ now is 100 shares of long stock and one short call with a total Position Delta of 75.  Let’s say just prior to earnings, XYZ moved lower almost to a point where you’d consider buying more shares. Instead of buying more shares, you decide to sell one put contract that is slightly out-of-the-money and has a Delta of 0.40.  Since you are selling the put option, the Delta is positive. Keep in mind, the Delta of the stock position will never change (100), but the Delta of the covered call will change based on the price of the underlying stock and the passing of time. Let’s assume that due to the drop in the price of XYZ and the passage of time that the Delta of your short call is now 0.20.  Now let’s look at your total theoretical position:

Long 100 shares of XYZ 100 Delta

Short 1 XYZ call contract - 20 Delta

Short 1 XYZ put contract   40 Delta

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Total package:                 120 Delta

Your Position Delta is now 120, meaning the value of the combined position will initially change by $120 with a corresponding one point move in the underlying.  Be aware, options prices can move quickly based on price action and volatility, and when they do, their Deltas will also change.  Also, since you’re selling a put option, if the stock closes below the strike price (at expiration), you may be forced to buy the stock at that price.

The above example demonstrates how you can generate income by selling a call and put, while also helping you stay informed about the theoretical size of the position (including options), or Position Delta.  

That great’s, but you may be asking, where can I find the Position Delta?  Simple, just add this column to your Positions tab in StreetSmart Edge and group your positions by the underlying equity.  

Source: StreetSmart Edge®

(In the above image, the total Position Delta is 191.6725. For every $1 move (up or down) in XYZ, the value of the position will theoretically increase or decrease by approximately $191.67.)

Finding the Delta of an option is quick and simple.  Add Delta as a column in the options chains in StreetSmart Edge:

Source: StreetSmart Edge®

If you trade options, I encourage you try adding the Delta (Position) as a column in your Positions tab, and adding Delta to your options chains.  It may take some time to really learn and understand the most effective ways to monitor your positions, but understanding comes through practice and experience.  Watch how the Position Delta changes as the underlying price of the equity and options change, like right before and after events or earnings reports. 

Once you start following Position Delta, you will notice a few things:

  1. It changes.  As the underlying price moves up / down, the Delta of your options position will change while the Delta of your equity position does not.  As a result, your net Position Delta of the package will vary depending on the underlying price action, along with changes in the other option pricing variables such as the passage of time. 
  2. Net Position Delta is a great measure of how bullish / bearish / neutral you are on a security.  If you are very bullish, you want a higher Delta.  If you are becoming less bullish on the underlying equity, you might want to lower the Delta, and if you are downright bearish on a security, you can close your entire position or consider a net negative Delta position. 
  3. Monitoring the Position Delta can be a great way to get a snapshot of the risk exposure of a multi-leg position (and you may adjust it, if appropriate).

I encourage you to engage, practice, and continue your journey to be a better investor or trader! 

If you have questions about this concept or anything else, call us.  We’re here to help. 

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For the sake of simplicity, the examples in this presentation do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which are factors that may significantly affect the economic consequences of strategies displayed. Please contact a tax advisor for the tax implications involved in these strategies.

Past performance is no indication (or "guarantee") of future results. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

The information presented does not consider your particular investment objectives or financial situation, and does not make personalized recommendations. Any opinions expressed herein are subject to change without notice. Supporting documentation for any claims or statistical information is available upon request.

The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Examples are not intended to be reflective of results you can expect to achieve.

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options." Supporting documentation for any claims or statistical information is available upon request.  Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received. Investing involves risks, including loss of principal. Hedging and protective strategies generally involve additional costs and do not assure a profit or guarantee against loss.  With long options, investors may lose 100% of funds invested. Spread trading must be done in a margin account. Writing uncovered options involves potentially unlimited risk.

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