Equity System for Options: Feasibility Guidance

[btowntrader54]

Hi All,


The short of it:

Developed an intraday indicator that presents opps to the long side on fairly liquid equities ($1b mkt cap+, 300k shares traded, price>$15). Could use guidance on the following if you trade equity options as your main/secondary asset class. These should be simple for you but I'm still figuring everything out while in testing.

How would one figure out the proper strike to use if a trigger is hit? Again, the position will be bought/sold the same day - no overnights. I'm assuming nearest-expiration date is the proper timing.

What measure can I use to determine what a 1% change in the price of the underlying equity yields in the Calls? I believe it's a greek. Apologies for options ignorance.

Thanks

 

[BeatingtheSP500]

The term you are referring to is Delta. It will range from 0 to 1 for calls and -1 to 0 for puts.

 

[dethkultur]

Quote from BeatingtheSP500:

The term you are referring to is Delta. It will range from 0 to 1 for calls and -1 to 0 for puts.

Not exactly... quoted delta is the change in premium for a one point move in the underlying, not a 1% move. You can do a simple ratio to get an approximation (take the percentage move that a one point move in the underlying would be, and divide the delta for the option by that ratio (x 100)). It won't be ideal (you can get closer if you do some fancy stuff building a curve that takes gamma into effect) but that should be close enough for what you are trying to do.

 

[hlpsg]

Quote from SchraderTrader:
How would one figure out the proper strike to use if a trigger is hit? Again, the position will be bought/sold the same day - no overnights. I'm assuming nearest-expiration date is the proper timing.
Thanks [/B]

if margins are not your main concern (i.e. you can afford to tie up a little more margins), and you want to maximise your profit with each point move, then it's logical to just choose the first strike with a delta > 0.9.

If margins are not a concern at all, i.e. you're trading your entire capital on one or two options at any one time, then pick the most ITM option whose delta is closest to 1. You lose less in time decay that way too.

The further in-the-money the call you buy, the more margins you'll have to tie up. So if you need to balance margin requirements v.s. max profit potential per point move, then I think the answer won't be as simple.