uploaded image

Multi-Leg Position Delta: Leave No Leg Behind

By:Josh Fabian

At tastylive, option spreads like verticals, short strangles and iron condors form the core of our strategies. And those strategies involve two or more options.

Take a short strangle. It’s short an OTM call and an OTM put. We enter that short strangle as one single transaction so we have the short call and short put in our account simultaneously. We don’t “leg” into the short strangle by selling the put, for example, then waiting a while and selling the call. But why not?

It comes down to delta.

A short strangle has a pretty low delta because the long deltas from the short put are offset by the short deltas of the short call. And the goal of a short strangle is to make money from time decay, not picking the direction of the stock or index. Legging into a short strangle turns the low delta time decay trade into a high delta trade that depends on guessing the direction of the stock price correctly. And all our research at tastylive suggests that stocks have a 50/50 chance of moving higher or lower. Do you like to have your money rely on a coin flip? Neither do we.

Here’s a real-life example: MSFT has 57% IV rank. I don’t know which way MSFT is going to go, but I want to collect some of the rich option premium that the 57% IV rank provides. With MSFT at $51.50 (as of Jan. 28), the March weekly 49.5 puts have a 32 delta and the 53.5 calls have a 32 delta. The short put would create +32 deltas and the short call -32 deltas, and give the short 49.5/53.5 strangle a delta of 0. If I try legging into the strangle by selling the 49.5 put first, I have +32 deltas in my account.

If MSFT goes up, great! But if MSFT goes down, I’m long 32 shares of the stock. Not so great. I don’t really want many long or short MSFT deltas in my account, so I enter the short strangle as one trade.

Some people think that they can get a better price for a short strangle, for example, by legging into it. Sell the put and see if the stock rallies so they can sell the call at a higher price. Do that, and you’re really trading a 50/50 stock bet. That’s not the tastylive way. Focus on the time decay and probability. Those are things you can control.

Josh Fabian has been trading futures and derivatives for more than 25 years.

For more on this topic see:

From Theory to Practice: Expected Move Calculation January 27, 2016
Confirm and Send: I’ve Lost My Short Deltas August 25, 2015

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer.  Options, futures, and futures options are not suitable for all investors.  Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.

tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.

tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.

tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.

© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved.  Applicable portions of the Terms of Use on tastylive.com apply.  Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.