We have done some research on thisin the webinar the other night Mike pointed out how Kurt did such a good job detailing in the Blueprint how the put option would not lose at a 1:1 ratio as the stock moved up in price. When I set up my initial RPMs, my stock has a delta of 1 and my put may have a delta of around -.70.  If the stock moves up 1 point, I still will have a positive $0.30 gain on the position.

Like this:

3A%2F%2F0.gravatar.com%2Favatar%2Fad516503a11cd5ca435acc9bb6523536%3Fs%3D32&r=G /% Michael Chupka

Posted December 10, 2009 at 5:22 PM

Hi Chuck!

The analysis is correct, in the sense that I was referring to the deltas at the time of entry. Both positions are going to adjust as the stock moves. The Gamma will dictate (in theory) how much the deltas of each option will change as the stock moves. This is difficult to use in an analysis, as the Delta and Gamma are always changing as the market moves or does not move.

If there is a sudden spike in the stock, it is possible that the change in Delta and Gamma may be more favorable for the ITM Long Call + ITM Long Put over the Married Put position, but the move has to be significant.

Lets look at one of Kurts recent Plain Vanilla Trades:

11/24/2009

Buy 100 shares CHKP @ $33.01 (delta of 1)

Buy 1 July 35 Put @ $ 3.99 (delta of -0.60, gamma of 0.06)

Total Invested $37.00

Guaranteed Exit $35.00

Total At Risk $ 2.00

If CHKP were to move up 1 point, we would have a positive gain of $0.40 (stock goes up $1, put drops $0.60). The Delta of the Put option would then adjust (theoretically) to -0.54. As the stock moves up another point, we would gain $0.46 on the position. The Put Delta (and the Gamma) would adjust as well.

Now, lets compare this to an In-the-Money Long Strangle on CHKP:

11/24/2009 CHKP @ $33.00

Buy 1 July 35 Put @ $3.99 (Delta of -0.60, Gamma of 0.06)

Buy 1 July 30 Call @ $4.70 (Delta of 0.72, Gamma of 0.05)

Total Invested $8.67

Max Risk = $3.69, or 42.5% (If stock is between 30-35 on exp)

If CHKP moves up 1 point, we would expect a gain of $0.12 on the position gain $0.72 on the Call, lose $0.60 on the Put. The Call Delta would adjust (theoretically) to 0.77, the Put Delta would adjust to -0.54. If CHKP gains another point, we would gain $0.23 on the position.

The monetary gain values for the ITM Long Strangle are lower than the monetary gain seen with the Married Put. Until the stock has a significant upward move where the Long Call would have a delta of 1, the Married Put position will have a larger delta gain for each point the stock moves up.

Yes, I am using the term Monetary Gain. The ITM Long Strangle is a leveraged position, therefore the percentage gains might be higherbut notice that the potential percentage loss on the Strangle is also much higher. The Strangle is at risk for 42.5% of the initial invested capital. Even if you only trade one or two contracts, you can not afford to suffer 40% losses in your account. That is the whole premise of Kurts RadioActive Trading methodology: To teach others how to limit their risk and not place wagers on over-leveraged positions that can wipe out portfolios over time.

By the way, right now CHKP is trading at $33.11. The July 35 Put is trading at $3.80, and the Long Call is trading at $4.70.

The Married Put position has a loss of $0.09 per share, or 0.2%. The ITM Long Strangle position has a loss of $0.19 per share, or 2.1%.

I also have an example of a RadioActive Married Put vs. ITM Long Strangle position on NEM where the stock moved up $2.50 after both trades were opened. The Married Put position could have been liquidated for a gain of $0.80, or 1.6%, but the ITM Long Strangle would have had a loss -$1.35, or 10.5%.

If you would like to see the specifics of that transaction, please let me know!

Sincerely,

Michael Chupka

Director Of Options Education

3A%2F%2F0.gravatar.com%2Favatar%2Fad516503a11cd5ca435acc9bb6523536%3Fs%3D32&r=G /% Thomas

Posted July 13, 2011 at 10:44 PM

I think both of you have it half right and may be missing one key ingredient. It may just be income method number 11. The reason mike is right because of the dynamic state of the market and delta and gamma are moving targets. Chuck is partly correct because there will be price movment that may be favorable. The solution. By using the CBOE option calculator u can get more precise reads on delta. Now the greek no one talks about is good old father time or theta. I created a synthetic position by doing the following