Delta Team: How Our New Delta Filter Can Improve Your Trades

Delta Team: How Our New Delta Filter Can Improve Your Trades

Are you familiar with the Greeks? Not Greek history, but rather, how they apply to options trading in the form of delta, gamma, theta and vega? If you’re not familiar, a guide can be found here. For those that are familiar, you may be happy to hear that the Option Party system now has a delta filter option. 

So what is delta? For those that don’t feel like learning about gamma, theta and vega, let’s just offer a quick refresher on what delta is.

Simply put, delta measures how much the option price will change for each $1 increase in the underlying asset. Its figure stands between -1 and 1. If we see a call option that has a delta of .38, it means the call will increase by $38 should the underlying stock increase by a dollar. For a put, we see the opposite. If we have a delta of -0.4, the put will lose $40 for each $1 increase in the stock price.

There are a lot of factors in determining the delta. The most important is how far in- or out-the-money the option is. A deep in-the-money (ITM) call will likely have a very high delta. It’s possible for it to even equal 100, meaning the call mirrors the stock price step-for-step. The further out-the-money (OTM) the call is, the lower the delta will read. An out-the-money call with very little time remaining until expiration could command a reading of 10 or less.

Filter by Delta

Let’s look at what this filter can do. When users are on the “Screeners” page, they can go over to the “Options” tab on the right. Right below Moneyness — which filters how far in- or out-the-money an option is — is the new filter. Depending on the strategy a trader uses will determine which delta filters are the most appropriate.

Option Party's Delta Filter

For instance, if we only have a single leg options trade, then we only need to worry about the long leg or short leg — not both. For instance, if we sell cash secured puts, we only need to use the “Short Leg – Min” and “Short Leg – Max” option. On the flip side, if we buy a call or a put as our trade, then we’ll use the long leg delta filters.

Note: the first two filters are sorted by the short leg and the long leg. In other words, it’s not whether you have positive or negative delta, but whether you’re buying options (making it the long leg) or selling them (making it the short leg).

When used for single leg trades, filtering by delta allows investors to choose where on the options chain the trade will take place. It can eliminate deep in-the-money or out-the-money trades, or scratch out at-the-money setups if that works better. Each trader will have their own preference.

But it also works great for spreads because investors can choose the delta range for each leg of the trade. If Option Party users don’t want to do that, they can use the third filter to sort by net delta. Essentially, investors can assign a minimum and/or a maximum net delta to the entire trade. 

Note: On the short and long leg trades, the minimum is negative 1 and the maximum is 1. On the net delta filters, the minimum is negative 3 and the maximum is 3.

Why Use the Delta Filter?

Some investors may be wondering what the benefit of filtering by delta really is. Like every filter Option Party has released, not all of them will become the next favorite. But this filter will certainly have a spot in some traders’ toolbox.

On the call side, delta works from its highest levels when deep in-the-money to its smallest measure the further out-the-money we go. On the put side of course, the deeper in-the-money, the higher the negative delta goes, to negative 1. As it works toward at-the-money and eventually to far out-the-money, delta works its way closer to 0. In essence, we can use this new features to decide where on the options chain we want this trade to take place. It also impacts how much exposure we’ll be carrying in respect to a given security. 

Utilizing the delta filter also comes in handy for neutral strategy traders. Delta neutral strategies put traders in a position where they are not carrying any delta — they have a net delta of zero. Why would a trader do that? For those that aren’t looking for a direction trade and instead are playing for a collapse in volatility or looking for time decay to eat away at a position.

In many circumstances, the delta filter has many advantages. For some traders, it won’t be all that important. For others, it could be a game-changer.

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