THE GREEKS - DELTA AND THETA OPTIONS
Delta serves as a proxy for probability of success at expiration of the option contract and in combination with IV rank can be a great combination when selling options. This value is an absolute number thus a negative (put side of the option chain) or positive (call side of the option chain) value is irrelevant. The interpretation of Delta is based on 1.0 less the delta at a given strike. If the Delta is -0.14 on the put side then this translates into 1.0 - (-0.14) = 0.86 thus a ~86% probability of the trade expiring above the strike or being worthless at expiration. If the Delta is 0.20 on the call side then this translates into 1.0 - 0.20 = 0.80 thus ~80% probability of the expiring below the strike or being worthless at expiration. Selling options near a specific Delta that is out-of-the money places the statistical edge in your favor. Given enough trade occurrences, the probabilities will play out to reach their expected outcome. Thus trading at a Delta of 0.15 will yield a winning trade success rate of ~85% if all trades go to expiration.
Theta represents time decay over the lifespan of an option contract. Theta can work to one's advantage when combined with options delta and IV rank. As an option matures into its expiration date while remaining out-of-the money, the time value decreases as a function of time. Theta rapidly decays into the final stretch of the option lifecycle thus if an option is out-of-the money and near expiration the value of the option will be worthless or near worthless. When selling options to collect premium income, Theta is always working in your favor as time evaporates and the underlying security has fewer opportunities to challenge the strike price. When time decay is nearly complete, options can be closed out to realize gains.
RELATED OPTION TRADING TOPICS
Follow these 10 rules for Options chain explained Options strategy and
options trading success and simplified fundamentals
Actionable daily trade notification service for all opening and closing trades with commentary
perfect for those seeking to remove the guesswork in options trading
Founder and Managing Member
Stock Options Dad LLC
A Registered Investment Adviser (RIA) firm