I did some analysis today comparing the effects of buying an option with say a delta of 60% vs buying 60 shares outright. Either one of these choices has the same risk at the beginning of loss if stock prices go down. So call it an equal risk decision.
So the question is which investment choice will make the most money. Purchase an option at what delta, or buy the stock. I ran my analysis on ROKU from data I copied yday. I think you are going to be surprised with what I found, I sure was.
ROKU had a gamma of .009 so in general terms, the delta will go up 1% for each dollar rise in stock price. So I would expect the option trade to make more money because at expiration if prices have risen, the delta will much higher.
So the first important consideration is the BE price for an option. A bit counter intuitive to me, the option that is the furthest out of the money has the lowest BE price point. My first wow.
The 2nd observation, and this is really key to the analysis, is what is the breakover point where the option trade will make more money than the outright stock purchase. Again a big surprise to me that again the 40% delta option had the lowest cross over point. Prices only have to rise 4.9% before the option beats holding the stock. Another wow.
I did the profit analysis for a 10% and 15% price rise. ROKU can easily go up $50, so I thought these were two good point to evaluate. So again another unexpected result, the 40% delta makes more money than the 50% or 60%. I wonder what a 30% delta would have done. Now I am really rechecking my numbers.
And then the next question, what makes the most money, option or buying the stock. This time, not so much a surprise, the option makes the most money. The effect of gamma increasing the delta as price increases becomes very key to option. The difference is huge. For the 40% delta option, it will make almost $5,000 vs only $2,500 for buying the stock for a 15% rise in stock. If the stock only rises 10%, it is $2,900 for the option and only $1,650 for the stock.
And then the final question, which delta to buy. As you can see from the table, the 40% delta makes the most money.
So my conclusion, buy the 40% delta option.
- Only $1200 investment is needed.
- Profit in general terms, is twice that of buying stock
- 40% delta is the best
- Break even is the lowest
- Crossover for high profits with options is the lowest.
Everything I have been reading about buying options has always said to buy a 60% delta. My analysis shows this to be very wrong.
I will next recheck my numbers and add in a 20% and 30% delta to see what happens. I also need some time to process these results. The results are just too far from what I expected.