Sizing Option Positions Properly

Delta in focus

How does delta help:

Delta can give you an idea of how much "stock risk" you are taking on with an option trade. So it helps you with position sizing, because that's not always obvious with options. But it's important because you don't want to size too big and you don't want to size too small.

Example: you'd like to go long calls in TSLA but you want the position to "act" like long 100 shares. Delta can help. If you are targeting a call with a 50 delta you will have to buy 2 calls in order for the position to give you 100 shares of exposure. This is because 2 calls (representing 200 shares) will act like 100 shares, since each call at a 50 Delta acts like 50 shares.

So 2 calls times 50 Delta (0.5) equals long 100 shares of like-exposure. Delta is key to making sure you don't oversize or undersize. Keep in mind that deltas will CHANGE through stock movement and time. Reach out to me if you need help understanding this extremely important concept.

Hans