create a position with +100 deltas, giving
you the same risk exposure as the long 100
shares. So what’s the difference?
Well, if the stock price doesn’t change by
the options position’s expiration, the short
puts can be profitable, while the long stock
would have no profit or loss (unless it pays
dividends). In this case, the short puts have
positive theta. In exchange for that positive
theta, as the stock price moves up or down a
point or two, the profit and loss of the short
puts will be similar to the long stock. But
if the stock drops sharply, the put deltas
will move from -0.50 to closer to -1, and the
short two puts will have a delta closer to
+200. So the options position has more risk
and greater potential loss than the long 100
shares. Conversely, if the stock price rises
sharply, the put deltas will move from -0.50
to closer to zero, and the short two puts will
also have a delta closer to zero. In this case,
the long 100 shares can be more profitable
than the short two puts.
This leads us to the next strategy, the married put. That’s when you buy 100 shares of
stock because you have a long-term bullish
outlook and want to collect any dividends,
but you also want to fine-tune your delta
risk by buying puts.
Say a stock is $150 and you buy 100
BE TA WEIGHTING
shares to give you +100 deltas. If you bought
an ATM put, that would generate approx-
imately -50 deltas, giving the married put
strategy a net +50 of delta exposure. But say
you want between + 25 and + 30 of delta ex-
posure. In that case, you could buy two puts
that each have 0.35 delta. They generate -70
deltas and combined with the +100 deltas of
the long stock would give the married put
strategy + 30 deltas.
By selecting a certain OTM strike, and
depending on how many puts you buy, you
can get the delta you want without having
to buy an odd number of shares. As the
stock moves up and down, you can adjust
the puts to higher or lower strikes, or roll
to further expirations to maintain the same
delta exposure and continue the trade if you
choose. Keep in mind that rolling strategies
can incur significant transaction costs.
Synthetically, a married put is similar
to a long call, which has the same risk
profile. The reason you might consider the
married put is that the long stock never
expires, so you can treat the long stock and
long put independently for a longer-term
trade. If the stock price drops, the long
puts could be profitable and help to offset
the loss on the long stock. You may want to
consider selling the puts, taking the profit,
and holding the long 100 shares, hoping
they’ll bounce back. You could even take
things a step further by selling an OTM
call against the stock. This strategy gives
you a lot of flexibility but will limit the
stock’s upside potential.
Finally, delta finds one of its most powerful uses with beta weighting on the
FALL 2019 | tdameritrade.com | 29
thinkorswim® platform from TD Ameritrade.
Beta weighting is a way to convert the
deltas of individual stock positions to be
comparable to the deltas of an index, say,
the S&P 500 Index (SPX). This way you can
see how many deltas your FAHN position
has in SPX terms and also compare it to the
deltas for another position in SPX terms.
When you compare your beta-weighted
deltas, you can see which of your positions
has more delta risk than the others.
In short, beta is a measure of a stock’s
risk relative to an index like the SPX. Beta
weighting uses that information to nor-
malize individual deltas into the delta of a
single symbol for comparison purposes.
For example, Figure 2 shows a portfolio
composed of 100 shares each of a bunch
of different stocks, as seen in the Position
Statement section of the Monitor tab.
Before beta weighting, each position has
100 deltas. It’s difficult or impossible to
judge which positions have more risk than
others. But if you select the Beta Weighting
box at the top and type “SPX” in the field,
the deltas will be converted into SPX deltas.
The first symbol on the list has the equiv-
alent of 7.46 SPX deltas. Another position
has the equivalent of 41.12 deltas—about 5. 5
times bigger. Clearly, the 41.12 delta posi-
tion has more delta risk, so if you’re looking
to reduce the exposure of your portfolio,
you might consider reducing the deltas of
the higher-delta position first. That could
be done with short covered calls or long
married puts, for example.
IT’S EASY TO TOGGLE BETWEEN BETA-weighted and non-weighted deltas as you
drill down into the risk of your portfolio.
And a deep understanding of delta can help
you make informed and confident choices
as you manage your trades and portfolio.
Thomas Preston is not a representative of
TD Ameritrade, Inc. The material, views, and
opinions expressed in this article are solely those
of the author and may not be reflective of those
held by TD Ameritrade, Inc.
For more on the risks of trading and trading
options, see page 38, #1 & 2.
FIGURE 2: Beta weight your positions. From the Monitor tab on the thinkorswim platform, you can beta weight
positions in your portfolio to an index or symbol. This makes it more of an apples-to-apples comparison so you can
see which positions might be riskier than others. Source: thinkorswim from TD Ameritrade. For illustrative purposes only.
After beta weighting
to the SPX