Choosing options with delta

B

bsivia

Just a newbie question. The DIA, SPY, IWM, QQQQ, July 07 puts all have deltas in the range of 0.44-0.47, so all pretty close. If I believe that the market will correct in the next few months, then buying DIA puts would make the most sense, as assuming the same % drop in the indicies means a greater points drop in the DIA than in spy or qqqq? Am i getting this right?
 
Quote from bsivia:

Just a newbie question. The DIA, SPY, IWM, QQQQ, July 07 puts all have deltas in the range of 0.44-0.47, so all pretty close. If I believe that the market will correct in the next few months, then buying DIA puts would make the most sense, as assuming the same % drop in the indicies means a greater points drop in the DIA than in spy or qqqq? Am i getting this right?
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Your option pricing concept is wrong.

Option Delta is the change in the price of an option for a one point moves in the underlying.

0.5 delta: $1.00 change of underlying, $0.50 change of option price.
0.25 delta. $1.00 change of underlying, $0.25 change of option price

Delta has nothing to do the the % change of the price of the underlying.
 
If you wish to evaluate on a %-basis then

omega = (underlying price / option value) * (option delta)

may be helpful: the %-change in the option relative the %-change in the underlying.

e.g.

omega = 5 means that a 1% underl. change causes a 5% option change.
 
You should also note the volatility of each of those indexes when deciding which to buy puts in. The DJIA doesn't move up or down as much as the other indexes, and as you know the DJIA has recently been outperforming the other indexes by sometimes half a percent per day.
 
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