Using Delta
We've discussed what Delta is here, but in this post we want to point out how it can be used to monitor your portfolio positions.
Delta is the ratio that compares the change in price of an option to a corresponding change in the stock.
This is true for the option delta, but delta includes all of your position, including just straightforward stock holdings. It may seem obvious, but the Delta of a stock is 1:1. If the stock price goes up $1, your stock goes up $1/per share. But sometimes we may own stock, options, or both. Our delta makes it easy to see at a glance what our risk is if the stock goes down, and what our reward is if the stock goes us up.
This display option is available with most brokers. In Tastytrade you simply click the gear icon on your portfolio page, and go to Settings/Positions/Columns, then drag Net Delta in there. I like to have it be the first column so I can immediately see what my position size is in the stock.
The column will show up alongside the stock ticker looking like this:
Now you can see at a glance (in this example) that a $1 change in price of the first stock will result in a +$100 gain, and the second stock will be a $45 gain. Those first two are stock only holdings, but in the third one you can see the number is $139.30. This is a position with both some stock and some options.
The point is that you can look at your price target for a stock and calculate how much you stand to gain. You can also look at your stop price and see how much you stand to lose. The delta won't be perfect, as an option's delta fluctuates up or down as the stock price changes and time goes by, but it will give you a very good estimate.
For instance, say that the $139.30 number is for a stock that has 25 shares of stock, 3 at-the-money calls expiring in one month, and 1 out-of-the-money call expiring in 3 months. With a position like that it would be difficult, without the delta, to know what to expect if the stock price jumped from $120 to $150 in the next couple of weeks. But with the delta you can estimate at a glance that you would make about $4,200 (quick mental math of $140 x $30).
Your delta can also be a negative number. This occurs if you are short the stock, or own puts, for example. In this case you can see the last position in the column has a delta of -173.31. So, for every $1 the stock price goes up, the position will lose $173. However, if the stock falls $1, the position will make $173.
Hopefully this example of Delta will help you better understand it, and be able to use it in your own trade planning.