4. Using Delta

Futures traders always know where they stand because their profit or loss is merely the difference between their entry price and the current price of the futures contract.

Options traders face a slightly more complex situation, especially if their position consists of multiple strike prices. There are some shortcuts, however, that make it easy to see exactly how a position will perform without even needing the assistance of an options program.

Consider the following prices and deltas for November Soybean call options:

Nov 450 call = 36 delta = 74
Nov 475 call = 23 1/2 delta = 56
Nov 500 call = 15 delta = 39
Nov 525 call = 9 3/8 delta = 26
Nov 550 call = 6 delta = 18

Assume you're holding the bull call spread of long 1-Nov 475 call and short 1-Nov 525 call. It has a net price of 14 1/8 cents (23 1/2 minus 9 3/8).

What will happen to the price of the spread if Nov Soybeans rally 25 cents?

There are two ways to compute the impact.

The first way is to look at the prices of the 450 call and 500 call because they are each 25 cents closer to the money than the 475 call and the 525 call. The difference between them is 21 cents, so the spread would widen from 14 1/8 to 21 for a profit of 6 7/8 cents.

The other way is to look at the delta of the bull call spread and apply it to the move in the futures. The delta is +30 (56 minus 26), so 30% times 25 cents equals about 7 1/2 cents.

"Knowledge is power and all traders can benefit by continually bolstering their knowledge base. I hope to contribute in that regard."  Paul Forchione