Cycle Trading

[Duma]

I had to think about what you wrote, but I think I finally did understand what you were saying.

Let me summarize what I think I learned. I bought a 76% delta option that had an initial exposure of only 76 shares and I compared it to the same investment $ as if I had bought 76 shares of SPY.

I am used to seeing the delta increase on an option as the price moves higher away from the strike. I paid $17.76 for the option that had a TV of $3.17. Over the life of the option, the TV is going to go to zero for two reasons: Price movement away from the strike and the gradual loss of option days. It was clear from my data, that the biggest effect which I saw immediately was the price moving away from the strike. So spending more money for an option that had a longer duration, I think would have been a waste of money.

So since I started with a 76% delta and since I had $3+ in TV, I could never expect the delta over the life of the option to be anywhere close to 100%. As as I said, it actually calculated out to be 85% (profit of option / profit from 100 shares of SPY). 85/76=1.12, so holding the option, did give me a 12% increase in profit. I made light of this gain, but it is actually a pretty significant increase.

So will I do it again, probably. But the downside is that tracking was harder and I had to worry as the expiration date was approaching. However I am thinking I could have just let the option expire and let the option convert to actual shares, but with the market in a bit of turmoil, I wasn't interested.