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determine option delta for a call and a put combination

Personal Finance & Money Asked on December 3, 2020

how do I determine the delta of an option? Could I determine the delta by looking at the option chain? Also, is the delta of an option changing from time to time?

Moreover, after I know the delta, could I figure out the best strategy for a combination of a call and a put?

For example, I think a stock will most likely go up in the long-term, so I bought a call option with an expiration date one year later and the strike price is 10% higher than the current stock price. However, I am also worried the stock will go down in the first month. So, I decide to buy a put option with an expiration date one month later and the strike price 10% lower than the current stock price.

If I know the delta, could I figure out the best striking price for my call option and my put option. Also, how do I know how many put contracts I need to fully protect my call option?

I am new to option trading, so I am still learning. Thanks

One Answer

How do I determine the delta of an option?

There are several ways.

You can calculate the delta from a option pricing model in a spreadsheet.

There are a number of option pricing calculators online.

The easiest way would be: You mentioned in your other question that you use IBKR. Their option chains in the Trader Workstation offer you the choice of including a data column that contains the delta. Set up an option chain and configure it.

Your question hedging a one year call LEAP that has appreciated 10% with a long put 10% OTM is interesting. I don't mean to sound unwilling to answer but said answer is beyond your level of understanding as well as the space needed to explain how to do so. Delta neutral hedging is a complex subject. With some pricing software you could model (and graph) various scenaries and it would be far easier to understand. In this case, a picture is definitely worth a 1,000 words.

I'd suggest a temporary work around. If your call LEAP is up 10%, roll the strike up, booking the gain and lowering your cost basis. Yes, it will cost you some bid/ask slippage and some commissions - if you're still paying them (peanuts at IBKR) - and you can work out the delta neutral concept over time. Use a spread order for the roll rather than legging out and in.

Correct answer by Bob Baerker on December 3, 2020

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