Now, over the past few weeks, I’ve been focusing more on trader education. And that’s for a perfectly good reason…
It’s the difference between rolling the dice with your money and actually being a successful trader.
I know which one I would rather be. I’m sure you’re in the same boat. That’s why you’re here.
You can’t “get rich quick” by just piling your money into a trade you know nothing about and then crossing your fingers that it will pay off. That’s too much risk.
But you also don’t have to settle for growing your money at a snail’s pace.
Options are a great instrument for traders looking to make more money while also lowering risk.
In fact, options helped me turn $5,000 into over $25,000 in just 12 months. That’s a 500% overall return – unheard-of in the investing world. Even in its best years, the S&P 500 barely pushes a 30% return.
But you can’t make that kind of profit just by purchasing the first option you see. You have to know what you’re looking for and how a certain set of numbers can directly affect your option’s profitability.
Listen up, because you don’t want to trade another option until you know what they are…
How Options Greeks Directly Impact Your Profitability
Options are investing instruments that make (or lose) money based on a few specific things – the underlying stock moving, time passing, and implied volatility (IV) fluctuating. The exact dollar impact on an option’s value is revealed by indicators called “The Greeks.”
In fact, they’re the most important factors affecting an option’s price.
There are five option Greeks you’ll hear about – Delta, Gamma, Theta, Vega and Rho, but let me keep it simple for you and just focus on one of them today: Delta, which is one of the key driving forces behind option profitability.
As I said, the price of the stock, the amount of time available on an option contract and implied volatility are the most critical considerations when it comes to trading options.
As you get a better understanding of the Greeks I mentioned, your confidence in trading options will grow because you’ll have a greater understanding on how the Greeks can impact your profitability.
I’ll use the image in illustration 1, below, and break it down for you.
(Illustration 1: Greeks for a Long Call and Long Put Option)
Let’s start off today with the option Greek, Delta. To keep it simple, remember just two things:
The Delta’s sign (+ or -) can indicate which direction the stock should move in order to benefit your trade, and…
The value of the Delta refers to how much your investment might make or lose if the security moves up or down by one dollar.
So, look at the Delta value for the call option above. The sign is positive, which means the trade benefits when the stock rises in value.
And, if the stock’s price rises by $1.00, the investment is expected to gain $53.07 in value as well.
This is super helpful to you in determining how much money you can make as the stock’s price moves in your favored direction.
In the example of the call above, if you expected the stock’s price to rise higher by $5 in value, you would simply multiply the call Delta by 5. You’d expect that the five-dollar price increase could yield you $265 on your trade (53.07×5).
The opposite is also true, of course, so if the stock’s price falls by $1.00, we’d expect to lose $53.07 worth of value on the trade.
Here’s another real-world example…
In this call option on Amazon (NASD: AMZN), Delta reveals that if the stock were to rise $1, Delta would contribute $40.12 to the position’s value.
With the current value of the call at $4.03, that would equate to a 10% increase in profit. If you think about it a bit deeper, with the stock trading at $131, owning the stock would provide 0.7% increase in a stock position’s value with a $1 rise in the stock.
In other words, the call option would make well over 10-times the return of a stock position, revealing one of the superpowers of options… a far greater ROI than a stock position could ever provide.
With Delta distinguished, let’s take a look at what we call the “Delta Effect.” The “Delta Effect” tells us how much profit was derived from stock price movement over historical trades.
For example, in the Amazon (NASD: AMZN) call example below, we can see that over the past two earnings periods, entering 10 days before earnings, Delta contributed 231.49% to a total average return of 242.29%. The rest came from IV rush as revealed by “Avg Theta/Vega Eff (%).” (I’ll talk more about this indicator in a future article.)
In this case, the Delta Effect reveals that Amazon runs up hard in the 10 days before earnings, providing a large historical ROI. That tells us it’s an excellent candidate for a future trade.
See what a difference it makes when we take time to understand options?
It’s already helped generate a 504% overall gain in a single year.
Like I said earlier, this trading strategy helped turn $5,000 into over $25,000 in just 12 months.
Over the past year – to make sure it worked as well as I knew it could – I let a small group of followers have access to the trades I selected from it.
With just one trade a week, they had the chance to make an incredible 500% overall gain… if they’d just followed all 57 of my trades – both winners and losers.
Which means if you’d put $1,000 into each trade, my system could have helped turn a $5,000 starting stake into over $25,000. A $10,000 stake would have made over $50,000… $50,000 to over a quarter million dollars.
Just click here if you want to see exactly how we did it.
To your continued success,
Tom Gentile
America’s #1 Pattern Trader
