Hi,

I would like to apologise in advance for my ignorance as I am new to options trading. I am reading a lot about options but there is one thing I wanted to get clarification on.

I understand that if I want to calculate the leverage I can usedelta*underlying stock price)/(option price) = leverage. However I also know that delta changes with time (as do the other variables obviously). But how does this affect the leverage?

So my questions are basically thes: is the leverage that I calculate at the time of purchase only applicable for that point? Does the leverage, using the above mentioned calculation, change if I were to recalculate it at a point in time that is closer to the expiration date? If so does the leverage usually increase as time passes (like I know delta does)?

Regards

I'm relatively new to options, too - I've been studying and paying tuition (in premium) for about twenty years, now. So, consider the source as you consider my answer.

If I understand Delta as it applies to options, the higher the Delta the lower the impact price change of the underlying is likely to have on the value of the option. So, if the Delta is at or near 1.0 (or -1.0 for PUT contract), the change in price is nearly 1 to 1, so the value of your contract should change by about a dollar for every dollar of change in the underlying.
I've read that 0.66 (66%) is a pretty solid in-the-money (ITM) Delta value. I've also followed traders who use the term, "Lottery Ticket" for options that are far out-of-the-money (OTM) - as they have a low Delta but feature a huge payoff if your number comes up!

If you want to see an example of a lottery ticket option trade, look at the price of a CALL at the 1850 strike on TSLA on August 11th of this year. Although I don't have the price of the Aug 21st Expiry -
the 28th Expiry (on 8/11 it was selling for about $4 at the end of the day) would have given you a 65 to 1 ROI. So, your $400 entry on 8/11 by Friday, the 21st, was worth $26,000 - nice work, if you can get it...

Smart money often says we should sell options to collect the premium, but you were not asking about that, so I won't continue.

Let's hope someone smarter than me reads my reply and makes any necessary corrections.

Prophet85 

Hi, I would like to apologise in advance for my ignorance as I am new to options trading. I am reading a lot about options but there is one thing I wanted to get clarification on. I understand that if I want to calculate the leverage I can usedelta*underlying stock price)/(option price) = leverage. However I also know that delta changes with time (as do the other variables obviously). But how does this affect the leverage? So my questions are basically thes: is the leverage that I calculate at the time of purchase only applicable for that point? Does the leverage, using the above mentioned calculation, change if I were to recalculate it at a point in time that is closer to the expiration date? If so does the leverage usually increase as time passes (like I know delta does)? Regards

Hi @Prophet85

In addition to what @BrianDreamTrader posted, I would suggest trying learning page over at TastyTrade. Beyond the basic explanation there is tons of videos which takes a deeper dive into Delta: Option Delta

Robert

Prophet85 

Hi, I would like to apologise in advance for my ignorance as I am new to options trading. I am reading a lot about options but there is one thing I wanted to get clarification on. I understand that if I want to calculate the leverage I can usedelta*underlying stock price)/(option price) = leverage. However I also know that delta changes with time (as do the other variables obviously). But how does this affect the leverage?

Changes over time as well.

Prophet85 

So my questions are basically thes: is the leverage that I calculate at the time of purchase only applicable for that point? Does the leverage, using the above mentioned calculation, change if I were to recalculate it at a point in time that is closer to the expiration date?

Yes

Prophet85 

If so does the leverage usually increase as time passes (like I know delta does)?

Not necessarily. Option 'Charm' is the 'Change in Delta due to Change in Time'. If the option is in the money then the delta will increase as time passes, but if the option is out of the money it will decrease. Your leverage will behave the same way.

SMCJB 

Changes over time as well. Yes Not necessarily. Option 'Charm' is the 'Change in Delta due to Change in Time'. If the option is in the money then the delta will increase as time passes, but if the option is out of the money it will decrease. Your leverage will behave the same way.

Thank you for your reply, much appreciated!

Got bored this evening so decided to calculate leverage of CLZ20 options.

Thinking some more....

So if ...
$44 Call with price $2.77 has delta 0.534 and leverage 848%
$46.5 Call with price $1.61 has delta 0.385 and leverage 1051%

What's the leverage of $44/46.5 Call Spread?

The $44/46.5 Call Spread has price $1.16 and has delta 0.15 So Underlying * Delta / Premium yields 567%?
For comparison the $39 Call with price $6.21 has delta 0.774 and leverage 548%.
Or does leverage just not imply for a Call Spread?

SMCJB 

Thinking some more.... So if ... $44 Call with price $2.77 has delta 0.534 and leverage 848% $46.5 Call with price $1.61 has delta 0.385 and leverage 1051% What's the leverage of $44/46.5 Call Spread? The $44/46.5 Call Spread has price $1.16 and has delta 0.15 So Underlying * Delta / Premium yields 567%? For comparison the $39 Call with price $6.21 has delta 0.774 and leverage 548%. Or does leverage just not imply for a Call Spread?

How did you calculate delta 0.15 for the $44/46.5 call spread?

Just the C44 delta minus the C46.5 delta, 0.5341-0.3845 = 0.1496

If you want to understand leverage in options then study Gamma.