Delta Options Trading Course PDF

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DELTA
OPTIONS
TRADING
COURSE
A COMMODITY RESEARCH BUREAU PUBLICATION

These materials are reprinted from The Delta Options Trading Strategy.
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Delta Options Trading Course
THE FUTURES MARKETS BEST-KEPT

SECRET
DELTA, The fourth letter of the Greek alphabet, [] represents

change and is used in modern day mathematics to describe the
relationship between variables.
Be aware that investment in commodity futures and options for

potential profit is accompanied by the risk of loss. Your decision
to trade commodities should be based on your particular financial
circumstances and trading objectives.
INTRODUCTION
Every time we invest we want to maximize our chance of making a profit
and at the same time carefully limit our exposure to loss. Futures trading
offers tremendous chances for huge profits, but there are always chances
of substantial losses too. To be successful as futures traders, we must do
everything possible to control the size and the frequency of losses. Every
professional futures trader ranks risk control as the most important tool for
successful, profitable investing. If the losses can be controlled, the big profits
will eventually roll in. That is simply how the futures markets work.
There are many ways to approach risk control, but most of them also
put a cap on the chance of really hitting a big pay-off. In return for safety,
profit potential is usually given away. There is, however, a powerful trading
secret that gives you both edges of the sword: TOTAL RISK CONTROL
and UNLIMITED PROFIT POTENTIAL! In this, The Worlds Most Powerful
Money Manual & Course Bonus Pak. I will teach you the best big money-
making and, at the same time, risk-controlling techniques ever discovered:
DELTA OPTIONS trading. With DELTA OPTIONS trading, you can
actually DOUBLE or TRIPLE the size of your profits and at the same time,
COMPLETELY limit your risk. Of course there is some cost to this powerful
tool, but it can be a very low cost relative to the profits of DELTA OPTIONS
trading. After working through this Bonus Pack you will understand the
techniques, risks and huge reward potentials of DELTA OPTIONS trading
and will be ready to use this new power-trading secret.
Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 5

To start with, we must learn some fundamental principles about futures

options trading. With these principles in hand, I will reveal the methods
of successful DELTA OPTIONS trading used by top professional traders.
Remember, the subject of options trading can seem quite complex. Dozens
of long textbooks, full of complex equations and terminology, have been
written about options. As a result, most people have even been fooled into
thinking that options trading is just too complex for them to understand. I am
glad it seems that way, because this leaves substantial profit opportunities
waiting for those few of us willing to take advantage of them! There are many
ways to make money trading options in fact, we have produced an entire
course dedicated just to making money with options. DELTA OPTIONS
trading is simply one of the most effective methods of harvesting these profit
opportunities. As with every power-trading technique, there are specific
times when it should be used to magnify profit opportunities, and other times
when it is not very useful. We will conclude this manual with a section on the
techniques for choosing the right DELTA OPTIONS trades.
LEARNING THE ABCs OF OPTIONS

OPTIONS trading involves learning just SIX WORDS and completely
understanding their meanings. It can be that simple! So, our first job is
to learn these words. After learning the basic six, there is one more word
to learn, the magic seventh word: DELTA. Remember, there are just six
words and a magic seventh word that hold the key to profits in options
trading! So lets get to work!
WHAT IS AN OPTION?
When we purchase an option, we are buying the right to do something
during a specific period of time to come. We do not have to do it, but we
own the right to do it. A futures option is the right to buy (a CALL option) or,
alternatively, the right to sell (a PUT option) a particular futures contract at
a set price (called the STRIKE PRICE) during a limited period of time. The
time the option ends is called the EXPIRATION, and the price we must pay
for the option is called the PREMIUM.
These are the first five words. By the end of this course, you will
understand them and be able to use them. For a specific trading example,

we will look at using options to trade in the Gold market. Gold is just one
example of a market we can trade using options. Everything said here about
Gold options applies equally to all the other markets with options too. These
include the stock indexes, Silver, Oil, Treasury Bills and Bonds, foreign
currencies, grains, meats, Sugar, and many more. In fact, every major
market with enough price action to make people wealthy can be traded
through the use of options. But for our examples, lets now just talk about
Gold.
Suppose we believe the price of Gold is going to rise over the next
few weeks. We can purchase an option to buy Gold (an option to buy is a
CALL option) at a set cost per ounce, during a period of time fixed by the
EXPIRATION date of the option we choose. This set cost at which we can
buy Gold is called the STRIKE PRICE of the option. The amount of time we
have to use, or exercise, this option is set by the EXPIRATION date. We can
choose an EXPIRATION date many months away, a few weeks away, or just
a few days away. Which EXPIRATION we choose depends on the period of
time in which we think Gold will move up to our target price. The option can
only be used, or exercised, on or before that EXPIRATION date.
Of course, this option is going to cost us something. As with everything

else in the world, what it costs depends on what people think it is worth. The
price we will pay the person selling us the option is called the PREMIUM.
Once we have purchased this CALL option, we have an irrevocable right
to buy Gold at the STRIKE PRICE of the option at any time up until the
EXPIRATION date specified by the option. We have locked in the price we
will pay for Gold no matter how high it might go. Even if the price of Gold
goes way above the STRIKE PRICE of our option, we can buy it at the lower
price set by the STRIKE PRICE of our option. This is our profit potential in
owning the option, and if Gold does make a big move, that profit can be
huge relative to the price we paid for the option! Alternatively, if we are wrong
in our vision of the direction Gold prices will take and the price of Gold goes
crashing downward, we will have lost only the PREMIUM, or price we paid,
for our option. The advantage of this strategy is a limited risk we only
risk the amount we paid for the option, the PREMIUM and yet we retain
unlimited upside profit potential if Gold prices do indeed rise.

THE SIX WORDS

Look back over the capitalized words. These are the first five of the six
words. Re-read this and define each of the words in your own words as you
read. Then we will move on with our discussion and learn the sixth word,
VOLATILITY.
DEFINE EACH OF THESE WORDS:

1. CALL
2. PUT
3. STRIKE
4. PREMIUM
5. EXPIRATION
OPTIONS TRADING: BACK TO GOLD

Now that we have read through the basics, lets examine a few possible
trades. Suppose a few months ago we had suspected that Gold prices were
ready to move up, but we did not want to take the risk of entering a futures
contract trade. Gold was trading at $420 an ounce. We decided to buy an
option.
PUT AND CALL

First question: What would we want to buy, a PUT or a CALL?
We would, of course, wish to buy a CALL option. A CALL gives us the

right to buy the futures contract at a specific price, called the STRIKE
PRICE. A PUT would give us the right to sell at a specific price, and we
would use a PUT if we thought prices were going down. But we think they
are going up. So we purchase a CALL option. That was the easy question.
The next two questions are going to take a little more review and discussion.
STRIKE AND PREMIUM

Next question: What STRIKE PRICE should we purchase and how much
PREMIUM will we pay?

If we look in Investors Business Daily or The Wall Street Journal, we

see there are many possible STRIKE PRICES, all with different prices, or
PREMIUMS. Which one do we want? There is a STRIKE PRICE every $20,
that is at 400, 420, 440, 460 an ounce and so on. The closer the STRIKE
PRICE is to the current trading price, the higher the PREMIUM and the more
the option costs (remember, the PREMIUM is the cost of the option). The
further the STRIKE PRICE is above the current price of Gold, the lower the
PREMIUM for buying the option. We might think of each STRIKE PRICE
option as a different commodity. While prices will move in similar directions,
each will behave a little differently.
Exactly how much each Gold option costs depends on how likely traders
in the market believe it is that the price of Gold will reach and exceed the
STRIKE PRICE of the option. If we purchase the 460 STRIKE Gold option
when Gold is trading at $420 an ounce, Gold will have to move up over $40
an ounce before our option would be worth using. There is no sense in using
our option to buy Gold at $460 an ounce if we can simply go out and buy
Gold on the market at a price less than that. But if Gold does move up, say
to $480 an ounce, we can profitably exercise the option. We have the right to
buy it at $460! We can exercise our option and buy the Gold at $460 (our set
STRIKE PRICE), and then if we wish, immediately sell it back at the current
market rate of $480. By doing this, we pocket a profit of $20 per ounce. Each
Gold CALL option gives the right to buy one futures contract of 100 ounces,
so we would be able to make a quick $20 an ounce on 100 ounces, or a total
of $2,000 ($20 x 100 ounces)! To determine our net profit on this transaction,
we must deduct from the $2,000 we receive at sale, the original cost or
PREMIUM, we paid for the option.
STRIKE AND PREMIUM

Next question: What STRIKE PRICE should we purchase and how much
PREMIUM will we pay?
If we look in Investors Business Daily or The Wall Street Journal, we

see there are many possible STRIKE PRICES, all with different prices, or
PREMIUMS. Which one do we want? There is a STRIKE PRICE every $20,
that is at 400, 420, 440, 460 an ounce and so on. The closer the STRIKE
PRICE is to the current trading price, the higher the PREMIUM and the more
the option costs (remember, the PREMIUM is the cost of the option). The
further the STRIKE PRICE is above the current price of Gold, the lower the

PREMIUM for buying the option. We might think of each STRIKE PRICE
option as a different commodity. While prices will move in similar directions,
each will behave a little differently.
Exactly how much each Gold option costs depends on how likely traders
in the market believe it is that the price of Gold will reach and exceed the
STRIKE PRICE of the option. If we purchase the 460 STRIKE Gold option
when Gold is trading at $420 an ounce, Gold will have to move up over $40
an ounce before our option would be worth using. There is no sense in using
our option to buy Gold at $460 an ounce if we can simply go out and buy
Gold on the market at a price less than that. But if Gold does move up, say
to $480 an ounce, we can profitably exercise the option. We have the right to
buy it at $460! We can exercise our option and buy the Gold at $460 (our set
STRIKE PRICE), and then if we wish, immediately sell it back at the current
market rate of $480. By doing this, we pocket a profit of $20 per ounce. Each
Gold CALL option gives the right to buy one futures contract of 100 ounces,
so we would be able to make a quick $20 an ounce on 100 ounces, or a total
of $2,000 ($20 x 100 ounces)! To determine our net profit on this transaction,
we must deduct from the $2,000 we receive at sale, the original cost or
PREMIUM, we paid for the option.
VOLATILITY
How much PREMIUM will we have to pay for our Gold CALL option?
Remember, to obtain the profit in the above example, the price of Gold
had to move from $420 per ounce to $480 per ounce, and this is a pretty
big move. So how much is that option with a 460 STRIKE going to cost
us to begin with? Well, that depends on how likely traders in the market
think it is that Gold will make a big move up. If the price of Gold has been
rather steady, and there have been few major moves, traders will figure the
chances of Gold making a big move upwards are rather small. It will not
cost very much to buy a Gold option with a STRIKE PRICE way beyond
what traders think it is likely to be worth during the life of the option. This
perception of how active a market is and how likely it is to make a big move
is called the VOLATILITY of the market the sixth word in our glossary of
option trading. When VOLATILITY in a market is low, it means prices are
very stable and big moves in price seem unlikely. When VOLATILITY is high,
the market is making big price moves.

Under circumstances where VOLATILITY is low, the person selling the

option to us figures it unlikely he will actually have to deliver on the option
he figures prices seem pretty stable and are not likely to go up above the
STRIKE PRICE, or not very much above the STRIKE PRICE. So if Gold is
selling for $420 an ounce and prices are stable (low VOLATILITY), we may
have to pay only a very small PREMIUM for the 460 STRIKE option, as
little as $50 or $100. The more active prices have been, and the more likely
it appears that Gold may move up to the $460 per ounce STRIKE PRICE
of our option, the more the option will cost.If prices have been very active,
that is, very VOLATILE, and moving upward, the option PREMIUM could be
several hundred dollars.
Either way, if prices actually do reach $480 an ounce, we can exercise

our option and pocket the $2,000. Our net profit on the trade is this amount,
$2,000, minus the PREMIUM we paid for the option. If we paid a low
PREMIUM of $100 for the option, our net profit was $1,900, twenty times the
capital we risked! If we paid a PREMIUM of $400, as we would have during
the Spring of 1987, when prices were VOLATILE, and the PREMIUMS
therefore higher, we still would have had a net profit of $1,600, or an 800%
gain. In either case, if we had been wrong about the direction of the price
move, the most we could have lost was the PREMIUM we originally paid.
Please note, you dont have to exercise your profitable option. You can
sell it to someone else for a nice profit.
So back to the first part of our question, what option STRIKE PRICE
should we buy?
The answer depends partly on how much we want to spend on the option
PREMIUM. The STRIKE PRICES closest to the current trading price of Gold
will always be the most expensive. These are the options most likely to pay
off. Some STRIKE PRICES will even be below the current price of Gold, for
example, a 400 strike option when Gold is at $420. These options that are
already in-the-money are the most expensive. The 400 STRIKE option
gives one the right to buy Gold at $400 an ounce when it is currently selling
for $420 an ounce. This option will cost at least as much as the $20 an
ounce it is already worth (its current intrinsic value).
Generally it is best to buy the option with a STRIKE PRICE one or two
steps away from the current market price of the futures contract. In this case

when Gold is trading at $420 an ounce, it is probably best to buy the 440
STRIKE PRICE option. If VOLATILITY is high, we might want to consider
the 460 STRIKE option, but we must always remember that the farther away
the option STRIKE PRICE is from the current price of Gold, the less likely it
is that we will make money on the option. When we buy a distant STRIKE
PRICE (a far-out-of-the-money strike), we pay less money, and have less
risk, but we usually also have a lower chance of making a profit.
TIME IS MONEY
The third question: Which EXPIRATION time should we choose for our
option purchase?
In answering this question always remember: TIME IS MONEY! The

more distant the EXPIRATION DATE (the longer the period we have to
exercise the option), the more we will pay for the option (the higher the
PREMIUM will be). The reason for this is simple:No one knows, to the best
of my knowledge, what the future will bring. It is possible to make reasonable
guesses about the near future based on current circumstances, but about
more distant events we will always be ignorant. The farther into the future
our CALL option to buy Gold extends the more distant the EXPIRATION of
the option the more that option will cost.
The EXPIRATION DATE of each option is set by the exchange where

it is traded. Each futures contract has multiple different delivery months
throughout the year. Usually these are spaced one, two, or three months
apart, and we can trade options on any of these coming months. When
trading options, always discuss with the broker the exact EXPIRATION
DATE of the option. We must know how much time remains until
EXPIRATION, because this is our period of opportunity. We should note that
the option frequently will expire in the month before the futures delivery date.
For example, an option on February Gold futures will expire in January. By
selecting options on futures contracts with deliveries nearer or further away
in time, we can pick an EXPIRATION DATE for the options contract that is
anywhere from thirty or less days away, to many months away.

FACTORS THAT AFFECT THE PREMIUM BEFORE

EXPIRATION
Every day we own the option, chances increase that something will
happen to change the price of Gold. Given enough time be that months or
even years it is very likely something WILL happen to drive the price of Gold
up and make our option very lucrative. This is called the TIME PREMIUM.
A large part of the PREMIUM we pay for an option consists of this TIME
PREMIUM, the chance that something unknown and unexpected will
happen to change prices and make the option profitable. The more time until
EXPIRATION of the option, the more chance there is that circumstances
and prices will change. In purchasing an option, we pay the person selling
the option for his willingness to accept the risks of time and those unknown
events which may make the option a good investment for us.
If nothing happens and prices stay the same, the person who sells us
the option wins and pockets all, or part of our money. We have lost the
PREMIUM we paid, but nothing more. If, however, things do change, and
prices move as we thought they might when we bought our option, then we
pocket the profits. Thats why we bought the option in the first place!
The more VOLATILE the market, the more we will pay for time.
VOLATILITY implies there is a greater chance that things will change, given
enough time. So our PREMIUM will go up. When we buy an option, we are
truly buying time, and all the chances that time offers. The more time we buy,
the more we will pay. How much time to buy (how distant an EXPIRATION)
depends on our market strategy. With most trading strategies, it is unwise
to buy an option much more than 90 days long. The PREMIUM paid for an
option longer than this is usually just too high. Sometimes, time does cost
too much!
If only a few days remain until EXPIRATION, options with a STRIKE

PRICE far removed from the current trading price of the futures will be
essentially worthless. This happens when the STRIKE PRICE is so far away
from the current trading price that it is impossible, given current VOLATILITY,
for prices to move to or beyond the STRIKE PRICE in the options remaining
time. As the EXPIRATION DATE of an option approaches, and the time
remaining to exercise the option decreases, the PREMIUM (cost) of the
option will usually decrease. When the time remaining until EXPIRATION
is short, there will be very little time value in the PREMIUM paid for the

option. When there is little opportunity time left in the option, we pay little
for it.
WHAT HAPPENS AS EXPIRATION APPROACHES

As the EXPIRATION DATE for the option approaches, the PREMIUM
cost of the option will reflect more and more the intrinsic value of the option.
Time, and the opportunity value of time, has wasted away. If the option is
far-out-of-the-money (the STRIKE PRICE is distant from the current price
of the futures), the PREMIUM will be very small. This happens when traders
decide there is very little chance prices will reach the STRIKE PRICE of the
option and give it value in the time remaining until EXPIRATION.
Some options will be in-the-money as EXPIRATION approaches. For

a CALL option, this means that the STRIKE PRICE is less than the current
trading price of the future. For example, a Gold option with a STRIKE PRICE
of 460 is in the money when Gold is trading at 480. In this instance, the
option is worth at least $20 an ounce, because it grants the right to buy
Gold at $460 an ounce (the STRIKE PRICE), $20 an ounce below the
current market price of Gold futures. This is called the intrinsic value of
the option the amount it is worth in cash if it is exercised. As EXPIRATION
nears, the PREMIUM of an in-the-money option will approach its intrinsic
value, and there will be no additional time value added to the PREMIUM.
At EXPIRATION, the value of the option is equal to its intrinsic value. For
an option which is out-of-the-money, there is NO intrinsic value. The value
of the out-of-the-money option is based on its time, or opportunity, value
the chance that time will change prices and give it intrinsic value. As time
passes, the chance of this happening diminishes, and this value disappears.
At EXPIRATION, there is no time left, and the out-of-the-money option
is worthless. When trading options we must always remember, TIME IS
MONEY.
For each trading month of a futures contract, there will be a number of

options with different STRIKE PRICES. Each of these should be viewed as
a slightly different commodity. While they will all undergo changes in value
based on changes in the price of the futures, they will change at different
rates and in different amounts, depending on how close the STRIKE PRICE
of each is to the current trading price of the futures. Options on different
trading months of futures move differently in value because of differences
in their times until EXPIRATION. There are relationships between all the

options on a given futures contract since they all vary in a specific related
way with the futures prices, but it can take some time and study to visualize
these relations.
THE SIX WORDS

There you have the six key words of options trading: CALL, PUT, STRIKE
PRICE, EXPIRATION, PREMIUM, and VOLATILITY. Do you understand
them? If so, you are ready to explore the magic SEVENTH WORD: DELTA.
DEFINE EACH OF THESE WORDS AGAIN, AND MAKE

CERTAIN YOU UNDERSTAND THEM:
1. CALL
2. PUT
3. STRIKE PRICE
4. PREMIUM
5. EXPIRATION
6. VOLATILITY
THE MAGIC OF DELTA

DELTA means CHANGE. Change is the key to all profits. It really is a
magical principle; without change, there is no opportunity, no progress, no
growth. In futures option trading, DELTA reflects the amount of value of an
options change relative to the change in value of the underlying futures
contract. An understanding of how option DELTAS work is the key to
understanding DELTA OPTIONS.
The value of an option depends on how likely traders in the market think
it is that prices of the underlying futures will exceed the STRIKE PRICE of
the option. Look at this example: It is now January and April Gold futures are
currently trading at $470 an ounce. We decide to buy one CALL option for
the April Gold contract with STRIKE PRICE of 500. This option has 60 days
left until EXPIRATION. Remember, the CALL option gives us the right to buy
Gold at $500 an ounce any time during the next 60 days, up until mid-March,
at which time the option expires (an option on the April futures contract
usually expires in March always check the actual date with your broker). This
option PREMIUM, or cost, is $2.50 per ounce on the 100 ounce contract,

which works out to a total dollar cost of $250.
But Gold is trading currently at $470 an ounce, well below the 500
STRIKE PRICE of the option. What will happen to the value of this option in
the next week or two if the price of Gold goes up? Suppose in the next few
days the price of Gold increases to $480 an ounce, what happens to the
value of our option?
The question we are asking is simply, how much will the value of our
option increase for every dollar that the price of Gold increases? This is
where the concept of DELTA enters DELTA is change. Here is the definition
of DELTA: The DELTA of an option contract is the amount the price of an
option will increase or decrease with each increase or decrease in the price
of the futures contract. In this example, the DELTA tells us how much the
price of an option will change with each change in the price of the April Gold
futures, and the Gold futures contract our CALL option gives us the right to
buy.
The answer to our question depends on how close the current trading
price of Gold is to the STRIKE PRICE of our option, and how much time
remains until EXPIRATION. There are complex mathematical equations that
can be used to calculate what the DELTA should be, but I will teach you how
to figure it out very simply using a few days information obtained from The
Wall Street Journal, Investors Business Daily, or your broker. I will also teach
you some rules-of-thumb for estimating the DELTA values without using any
calculations at all.
CALCULATING DELTAS
In our example above, we purchased a CALL option with a 500 STRIKE
PRICE when Gold was trading at 470. We paid $250 for this option It is now
5 days later, and the price of Gold has increased to 480. Did the value of
our option change is it now worth more than $250? The answer is of course
yes, but how much? First, what happened to the price of Gold? The price of
Gold went up $10 per ounce, so the value of a 100 ounce futures contract
increased by $1,000 ($10 per ounce x 100 ounces). What happened to the
options PREMIUM? Our options PREMIUM, or value, did not increase as
much as the futures price did. After all, the price of Gold is still below our
STRIKE PRICE by $20, but the price of Gold is now closer to the STRIKE
PRICE, and there is a greater chance now that it WILL exceed the STRIKE

PRICE. The PREMIUM, or value, of the option has increased. If we look at

The Wall Street Journal, we will see that our April Gold CALL option with a
500 STRIKE PRICE is now worth $4.50 an ounce, or $450 ($4.50 per ounce
x 100 ounces).
Instead of waiting longer for the price of Gold to go higher and also taking
the risk of prices instead declining we could now sell our option back at the
current trading price of $450. This would result in our pocketing a $200 profit
($450 received on sale of the option minus $250 paid for the option = $200
profit). That is more than an 80% return in five days! We can alternatively
choose to hold the option longer and hope Gold prices continue to rise.
Remember, by holding the position, we also accept the risk that a decline in
Gold prices will cause our CALL option to lose value.
In this example, the price of Gold increased $10 an ounce (from 470 to
480), but the value of our option increased only $2 per ounce (from 2.50
to 4.50). This means that for every dollar the price of Gold increased, our
option increased $0.20 or 20% of the futures price change. Remember,
DELTA is the amount the option value changes per change in the futures
price. This can be thought of as a percent of the futures price change.
HERE IS THE KEY FORMULA FOR CALCULATING DELTA:

In this instance, the DELTA equals: [a] the amount the option price
increased, $2; divided by [b] the amount the futures price changed, $10.
This is equal to 0.20 (2/10 = 0.20). For every dollar that Gold prices rise, the
options price will move up 20 cents. This is the same as saying the options
value changed by 20% of the futures price move.
MAGIC IN THE AIR

The DELTA of an option is NOT FIXED. It varies with the futures price.As
the price of Gold approaches and exceeds the STRIKE PRICE of our option,
the DELTA will increase. That is to say, the value of the option will increase
by a larger amount for every dollar move in the futures price as the price of
the futures approaches and exceeds the STRIKE PRICE.
In our example, the price of April Gold is now at $480. Suppose in the
next two days it makes a big move up again, to $490.What will happen to the

value of our option? Well, we calculated the DELTA before to be 0.20. Using
that DELTA, we would expect our option PREMIUM to increase 20% of (or
0.20 times) the change in the futures price. The change we might expect
in the options value is then 0.20 x $10 = $2. That would mean our option
PREMIUM, or value, would increase by another $200 ($2 per ounce x 100
ounces).But the answer is actually better than that!
As the futures price gets closer to the STRIKE PRICE, the DELTA
increases. That means the value of the option increases by a larger
increment for every increased in the price of Gold futures. The futures price
has increased from $480 to $490 an ounce. If we look at The Wall Street
Journal we will see that the PREMIUM of our option has now increased
$3.10 from $4.50 to $7.60 an ounce. The futures price increased $10, from
$480 to $490 per ounce.
For every $1 change in the price of Gold, our option has changed $0.31,
or 31% of the change in Golds price. Notice that the DELTA is increasing as
the price of Gold moves closer to the STRIKE PRICE of our option. We are
making MORE money for each dollar increase in Golds price as the price
moves up. In the move from 470 to 480, we made $0.20, or 20%, for every
$1 increase in the price of Gold. As the price increased from 480 to 490, we
made $0.31, or 31%, for every $1 gain in Gold prices. Our option is gaining
value faster as the price of Gold gets closer to our STRIKE PRICE! This
is the magic of DELTA as prices move in our direction, we actually make
money faster, our options value increases by larger and larger percentages
of the change in Golds price! The reverse also holds, as prices move away
from us, we lose money more slowly as the DELTA decreases. As prices
move against us, our options value decreases by smaller and smaller
percentages of the change downward of the futures price.
What happens if the price continues to move up? If the price moves to
500, the STRIKE PRICE of our option, we will make $0.50, or 50% for every

$1 move in the Gold futures prices. Should the price still move higher, the
DELTA will continue to increase until it approaches a value of 1.00, or 100%.
When the DELTA is 1.00, the option PREMIUM will change 100% of the
change in the Gold futures price. A $1 move in the price of Gold will produce
exactly the same $1 move in the option PREMIUM (or dollar value). This
occurs when the option is far-in-the-money, when Gold futures are trading
far above the STRIKE PRICE of our CALL option.
I have enclosed a graph of DELTA values to illustrate how DELTAS

change with changes in price. Look at Figure 1 on the next page. This graph
shows how DELTA changes for a Gold option with a 500 STRIKE PRICE as
the futures price varies between 450 and 550. On the graph, we have the
futures prices listed along the bottom and the DELTA values up the side.
Notice it is an S shaped curve. As the DELTA of the option decreases
rapidly, then levels off near zero. Notice that when the futures price is at the
STRIKE PRICE, the DELTA is approximately 0.50. THIS IS A GOOD RULE
OF THUMB. An option DELTA will roughly be around 0.50 when the futures
price is at the option STRIKE PRICE. This means that when the futures price
is trading close to the STRIKE PRICE, the value of the option will change
about 50% of the change in futures that is, 50 cents for every $1 change in
the futures price.
As the price moves above the STRIKE PRICE, the DELTA value will
increase to nearly 1.0, at which point the option value changes dollar-for-
dollar with the futures price. As the price falls away from the STRIKE PRICE,
the DELTA will decrease towards zero. When the futures price is way below
the STRIKE PRICE, the option will be nearly worthless, and changes in the
futures price will cause very little change in the options tiny remaining value,
thus the DELTA will be close to zero. The exact configuration of the curve
depends on the VOLATILITY of the market, and the time remaining until
EXPIRATION of the option. But it will always have this S shape, with the
DELTA value of 0.50 occurring at the STRIKE PRICE of the option.

CALCULATING DELTA THE EASY WAY

To calculate the DELTA of an option, we need to have the futures and
option prices from two different days. Take the current issue of The Wall
Street Journal or Investors Business Daily and an issue from one or two
days before. Find the options and futures prices in each. Calculate [a] the
change in the option price between the two days by subtracting the first price
from the second. Do the same for the futures, subtracting the first price from
the second, to find [b] the change in the futures price. (See Figure 1.)
Now divide [a], the change in the option price, by [b] the change in the
futures price. The result is the DELTA. You will find that with practice, you
can easily do this simple calculation in your head or on paper in just a few
seconds.

DELTA OPTIONS TRADING
We started out by saying that every time we invest, our goal is to

maximize our chance of making a profit while carefully limiting our risk. The
problem with futures trading is that the risk can be unlimited. If prices go up,
we make money (if were long), but if they go down, we lose money at the
same rate! What if we could design a strategy that allowed us to make three,
four or five times as much money when prices do go our way, and strictly
limit our risk to a smaller amount if they go against us? Sounds like a good
way of doing things, doesnt it? Well, that is exactly what DELTA OPTIONS
trading does! And that is why we have spent so much time explaining details
up to this point.
Suppose, again, that we think the price of Gold is about to go up. Lets
examine how we can use a DELTA OPTION trade to maximize our profits,
and compare the DELTA strategy to simply buying a futures contract.
Consider this situation: It is January, and there is increasing international
unrest, we expect new problems in the Persian Gulf, and we think that any
more inflationary news will push the price of Gold substantially higher in
the next few weeks. We have $2,000 to risk, and want to establish a long
position in Gold. The price of Gold is currently $480 an ounce. The margin
in Gold is about $2,000 per contract, so we could buy one Gold contract and
use our risk capital to meet the margin requirements of this position. We buy
one Gold futures contract at $480, and deposit our $2,000 as margin.
In the next few weeks the price of Gold takes off and moves rapidly
higher. The price reaches $540 an ounce, and we sell our Gold contract. Our
profit is $60 an ounce on 100 ounces, the size of the futures contract. Our
total profit is $6,000. Not bad.
But suppose prices went the other way. There was peace in the
Persian Gulf, inflationary expectations died, and the price of Gold crashed
downward. Every dollar that the price of Gold moves down costs us $100.
When the price of Gold reaches $470 an ounce, we will have lost $1000.
Your brokerage firm will demand that additional margin be deposited. The
price finally moves down to $420, we run out of money for further margin
deposits, and exit the position. Our total loss is $6,000. Terrible.
What would have happened with a DELTA OPTION trade instead? It is

again January, and we want to establish that long Gold position. We have

$2,000 to risk, and decide to try a DELTA OPTION trade. Instead of using
our money as margin for a futures contract, we will buy several Gold options.
The idea of a DELTA OPTION trade is to purchase several PUT (or CALL)
options so that the combined DELTA of the options we buy is about 1.0.
If the options we choose to buy have a DELTA of 0.25, we would buy four
options. Why four?
Each option will initially increase in value 25 cents for every dollar
increase in the futures price that is what a DELTA of 0.25 means. The total
DELTA of an option position is calculated by adding the DELTAS of all the
options together. In this case, the total DELTA of the position equals the sum
of the four individual option DELTAS, 0.25 + 0.25 + 0.25 + 0.25 = 1. Since
we own four options, we will make 25 cents on each option when the price of
Gold increases $1. With our total position of four options, we will make $1 for
every $1 moved in Gold. The DELTA of our total position will initially be 1.
HOW TO MAKE THREE TIMES MORE MONEY

Back to our example. Gold is trading at $480, and the April CALL options
with a 500 STRIKE PRICE have a PREMIUM of $4.50 an ounce, or $450
per option ($4.50 per ounce x 100 ounces = $450). We examine the last
two days prices on The Wall Street Journal, and calculate that the DELTA
of this April 500 Gold CALL option is 0.25 (its PREMIUM has been changing
25 cents for every dollar change in Gold prices). With our $2,000 we buy
four options, at a total cost of $1,800, and save the $200 change. The total
DELTA of our position is 1. We will initially make one dollar for every dollar
change in the price of Gold. (For the technically advanced student only:
These following calculations are made with a market VOLATILITY of 15%,
interest rates at 6%, and 60 days until EXPIRATION but dont worry about
these technical comments.)
The price of Gold begins to move up, as we hoped. It quickly reaches

$490 an ounce lets say this happens in the next two weeks and our options
now have 45 days until EXPIRATION. As the price moves up, remember
the DELTA of our options is also increasing. At $490, the DELTA on each of
our options has increased to 0.35. We own four options, so the total DELTA
of our position is 1.40 (4 x 0.35 = 1.40).Now for every dollar increase in the
price of Gold, we will be making $1.40 on our option position!! And what
happens when the price hits $500 an ounce, the STRIKE PRICE of our

options? The DELTA on each option is now 0.5, and the total DELTA of our
position is 2 (4 x 0.5 = 2.0). We are now making $2 for every $1 increase
in the price of Gold, or twice as much as we would make had we bought a
futures contract!
As the price of Gold continues to rise, we make more and more for each
dollar move as the DELTA of our options increases. If the price reaches
$540, the DELTA of each option will be over 0.90, and our total position
DELTA will be 3.6. We will be making $3.60 for every $1 increase in the
price of Gold now we own the profit power of four-hundred ounces of Gold,
instead of the single one-hundred ounce futures contract we might have
been able to purchase using our original $2,000 as margin!
FUTURES VS DELTA OPTIONS POSITION

EVERY PICTURE TELLS A STORY

Figure 2, above, shows the profit curve for this DELTA OPTIONS trade.
The line marked with the + indicates the profit/loss potential of a single
futures contract. Notice it is a straight line, for every dollar change in the
price of Gold, up or down, there is a $100 profit or loss. When the price
rises from $480 to $540, we make $6,000, or $60 per ounce on 100 ounces.
When the price falls to $420, we lose $6,000.
Now notice the profit line of the DELTA OPTIONS trade. It is a curved
line, and a line curved in a very favorable way. As the price goes in the
direction of our trade, we make more and more. When the price moves
against the trade, downward, we lose incrementally less, until our maximum
loss of $1,800 the amount of our original investment is reached. If the price
of Gold moves up to $540, we will make over $14,000, well over twice as
much as with a single futures contract. When the market drops suddenly,
and against our expected projections, we lose a maximum of $1,800, the
amount of capital we chose to risk, and far less than we might lose on a
futures contract. There is never a chance of a margin CALL. Our risk is
defined and totally limited, and our profit potential, depending on how far
Gold prices move up, is doubled, tripled, or ultimately, nearly quadrupled! A
wizard once said that magic is simply power discovered unexpectedly. Here
resides the magic of DELTA: Unexpected and unlimited power to pro fit,
amazingly allied with total and predictable control of risk. Used in the right
way at the right time, this is a magic that can make futures-trading wizards
rich!
THE COST OF MAGIC

As you must see, this is a most powerful tool. Unfortunately, there is no
spell that produces gold from lead at least not one that I can share! This
strategy does have a cost, something is given away in return for the power.
Before using the DELTA OPTION approach, you must understand this cost.
Return to Figure 2 and examine the profit lines again. Can you figure out
what is given away in return for the power of a DELTA OPTION trade?
Notice that between 465 and 495 the DELTA OPTION profit line is below
the futures profit line.In our example trade, if Gold prices make a small
move, say from 480 to 490, with the DELTA OPTION trade we would make a
profit of $675. Had we purchased a Gold futures contract instead of a DELTA

OPTION position, we would have made $1,000 on this small move.
If prices stayed the same, that is, Gold continued to trade at $480 per
ounce, our futures position would be a break-even venture. We would
neither make nor lose money (excluding the brokers commission). Our
DELTA figure 2 option position would, however, lose money. As every day
passes, our options with a 500 STRIKE PRICE are losing TIME PREMIUM.
Remember, time is money! Indeed, if we held our position all the way until
EXPIRATION of the options, and prices did not move at all from 480, we
would lose our entire investment of $1,800. This is, of course, because our
500 strike options are out-of-the-money and will expire worthless.
The cost of a DELTA option position is this: If prices fail to move much
one way or the other, one makes slightly less or loses slightly more than
he or she would with a futures position. There are two clear advantages
of a DELTA option trade: If prices move dramatically in our favor, we make
far more than we would on an outright futures contract; and if prices move
strongly against us, we lose far less.
Understanding these costs, we can design a trading strategy that will

use option DELTAS efficiently and profitably. This is not the approach to
take every time we trade. As with all tools, it must be used properly to work
properly.
WHEN TO USE A DELTA OPTION TRADE

As we see above, a DELTA option position is designed to multiply profits
and limit risks in a big market move. When the markets are going nowhere,
it is not wise to use this strategy. How do we spot a market that is about to
make a big move? If I had a certain answer to that question, I would be a
fool to share it. But there are frequently key times when it seems something
big is about to happen. We may not be certain which way the market will
move, but we know something is going to break loose.
Every two or three months a price trend occurs in one of the many futures
markets that offers tremendous opportunity for profits. Through the use of
the DELTA option strategy, those profit opportunities may be amplified while
keeping the risks limited. No one catches every big move, but with diligence
and study, wizards and with the right tools eventually will find themselves in

the right place with the right magic. Lets examine two key events in 1987
which would have made any DELTA option trader rich, IF he had used
his magic at the right time. After reading these, proceed to the workbook
exercises at the end and see what you have learned.
A SILVER CROSS
William Jennings Bryan inflamed American political rhetoric with the
theme of Silver eighty years ago, and the fire is still burning. Nothing, but
nothing, moves like Silver. Remember this, because every few years the
theme is repeated again and again, fortunes are made and lost in the tinkling
sound of fury of the Silver market.
So in the Spring of 1987, when Silver started to heat up, the wizards were
ready. A DELTA option strategy is perfect for this market when it begins to
heat up. This is a dangerous market because it has proven its ability to move
both ways very, very quickly. A DELTA option position perfectly multiplies the
upside potential of a breakout and eliminates the risk of a disastrous move
downward. A good trader knows he will be wrong often, but when he is right,
he is very right.
As Silver moved to $6.50 an ounce, it appeared a major breakout to

the upside was possible, and a DELTA option position should have been
initiated. The 700 strike ($7 an ounce) option had a DELTA of 0.35, and three
of them could have been purchased for about $1,700, depending on the day
the position was initiated. The total risk exposure in the position was then
$1,700.
In the next three weeks the market went wild. The price of Silver surged
to well over $10 an ounce during three limit moves upward, and the 700
strike option was worth over $20,000 on the final day of the move. Using
the DELTA option strategy suggested, and purchasing three options, our
total profit could have been $50,000 to $75,000, depending on the moment
we chose to exit the position!! I know people who did precisely this, except
some of them made much more I should add, I also know people who were
too greedy to take their huge profits, who wanted more, and who now have
only regrets.
Our total risk was $1,800 OR LESS! In most instances, if the market fails
to move, we will be able to exit our position with a loss well less than our

maximum risk. In fact, this is one of the principles of DELTA OPTION trading:
If your position loses half of its value, exit the position and take the loss.
Using this loss-limiting technique, our total risk could have been less than
$1,000. Our profits were 50 to 75 times this amount! We could have been
wrong twenty or thirty times (assuming we had that amount of money to
invest) before we hit this big move, and still have made a huge profit on our
total investment (losses included).
But this was a rare case, you say. WRONG! Every few months a market
makes a move like this. In many instances in markets less VOLATILE than
Silver, a position can be entered with less than $500 an ounce or $1,000 of
risk capital. Not every position will pay off, many will result in losses. But with
diligence and skill and maybe a good dose of luck now and then big profits
can be pocketed.
THE CRASH OF 1987 (OR, WHY IS THAT MAN SMILING?)

In October, 1987, many people felt the stock market had reached the
end of the line. Others felt another right move upward was brewing. Either
way, it looked like something major was in the wind. The market had made
a significant, but not major, move downward. In the past, these corrections
had all been followed by explosions upward. But now it seemed that a BIG
move downward MIGHT be close at hand.
Hum, time for the wizards hat. What is our tool today, rat teeth, bat wings,
or essence of toad blood? Ah, yes, of course! DELTAS! The time is ripe,
the broth is bubbling and steaming. Where it will go, nobody truly knows
not even wizards. But wizards do know the risks and the right tool for the
moment. The autumnal equinox has passed, Halloween is coming. It is mid-
October, and time for a little DELTA magic. Being by nature pessimists, we
figure the stock market has topped out, and we are going to bet it will make
a move downward. We know we could be wrong, and want to limit our risk
against a dramatic move upward, since we know that, too, is a possibility.
Our solution: a DELTA OPTION trade.
The market is trading around 330 on the S&P 500 Index, and the 310
PUTS have a DELTA of about 0.25. They can be purchased for $900 each.
We could trade the New York Stock Exchange Index futures with a smaller
contract size and PREMIUM, but we decide to trade the S&P and risk a
larger amount the cauldron is bubbling in an auspicious fashion, and we

are going to shoot for the big bucks. We take four options, with a combined
DELTA of 1.0.Our risk capital is $3,600. We will risk half of this, and exit the
position if our loss exceeds $1,800.
Black Monday arrives, everyone is in a panic. But we sit in a corner,

wand in hand, with a strange, rather shocked smile on our faces. It seems
we have just made about $40,000 on each of our four S&P 500 options. Our
$1,800 risk just made us $160,000! My, oh my, do we smile we can even buy
that new sequined wizards cap we have been coveting for our Halloween
costume this year. All the better, we know most of those phony Wall street
Wizards will be wearing hocked garbs to the ball. And people are looking at
us, asking, why is that man smiling?
Now that is an extraordinary move for the stock market. Moves like this
are not so unusual in Silver, Sugar, Cocoa, Soybeans, Gold, Crude Oil,
and many, many other markets which we can now trade with the DELTA
OPTIONS strategy. If we would have taken a futures position, we would
have made one-fourth the profit on this move, while accepting an unlimited
risk. Instead, we made four times as much, and fully limited our risk. Magic is
what you make it. This may just be sleight-of-hand, but it sure can work.
AN IMPORTANT REMINDER
No strategy of trading futures contracts can guarantee profits. To make
money, one must always accept some risks. By using different investment
and trading strategies, the ratio of possible risk and reward can be varied
but some risk will always remain. You must understand the risks before you
undertake any investment. Although DELTA OPTIONS trading limits risk and
offers tremendous opportunity for profits, there is always the risk of loss.
An understanding of this risk is essential. Never risk money that you cannot
afford to lose, BECAUSE YOU MAY INDEED LOSE IT!
Now move on to the workbook examples, and check your knowledge. If

you have failed to understand any major points, review the manual again.
After completing this course, you are ready to begin paper trading. Try
out your knowledge, practice calculating DELTAS, practice a few DELTA
OPTION trades and see how they work out. At this time, if you have not
already done so, you might want to open your trading account with a
reputable brokerage firm. GOOD TRADING and GOOD LUCK!

DETAILS, DETAILS - A FEW QUESTIONS & ANSWERS
Q. What market should I trade?
A. Only trade markets with a daily options volume of at least 2000

contracts. Markets that trade less than 2000 options a day are too thin,
and it can be difficult to get good price fills on orders. Your broker should be
able to help you avoid markets where the volume is too low. There are over
a dozen markets, including all the major futures groups, that have this sort of
volume, and volume is increasing quickly and will soon reach this level in a
dozen other markets. Look at the volume figures in The Wall Street Journal
or Investors Business Daily (personally, I think Investors Business Daily has
better futures information. It also includes charts on all the major markets,
updated daily).
Q. When should I establish a DELTA option position?
A. There is no easy answer. You must decide when to trade and what
strategy to use. Rely on all the information you currently use or can obtain.
When it appears that a market has strong potential for a major move, that is
the time for a DELTA trade. You will be wrong frequently, but when you are
right, profits can be huge.
Q. What STRIKE PRICE should I buy?
A. Calculate the DELTA of the various strikes using the technique you
have learned here. Remember that the option STRIKE PRICE at the current
futures trading price will have a DELTA of about 0.5. It is best to trade
options with a strike between 0.25 and 0.35.
Q. How many options should I buy?
A. That depends on how much you can risk. With a limited pocketbook,
it might be best to buy just one. This is not a DELTA trade but it can work.
Usually, it is best to buy three or four options with a total DELTA of around
1.0, give or take a little.

Q. How far from EXPIRATION should I buy the options?
A. The closer to EXPIRATION, the faster the options lose time value.
This loss of value is particularly fast in the last 20 or 30 days before
EXPIRATION. However, the closer to EXPIRATION, the cheaper the options
are. Usually it is best to buy options with about 45 to 75 days left before
EXPIRATION. There are times when you may believe a big move is just
around the corner. In that situation, buying an option with less than thirty
days until EXPIRATION may be cheaper, and end up more profitable on a
percentage-of-investment basis. Remember, if you are wrong, this option
will lose value more quickly than one with more time left. As a rule, stick with
the options that have about two months left until EXPIRATION when trading
DELTA OPTION positions.
Q. When should I exit a DELTA option position?
A. Remember the old futures trading adage, Bulls make money, bears
make money, but pigs just get slaughtered. If your position loses one-half of
its original value, exit the position and take the loss. NEVER hold a position
all the way to EXPIRATION if it is not in-the-money! On the other hand, if a
position is becoming very profitable, let it ride a while. But also remember
that other great gem of wisdom: Most fortunes are lost while trying to make
the last dime. The last dime is NOT WORTH A FORTUNE. Whenever you
are holding a profit that makes your blood bubble with greed for more, exit
the market. Let your greed simmer down, and pocket the profits. Put them in
the bank, but a new car with them convert them into something real that you
can see and feel. When paper profits become real things, their true value is
better appreciated. There is no room for an easy come, easy go philosophy
in this business. Profits do not come easily. When they do come, DO
NOT LET THEM GO! With profits in hand, there will always be another big
opportunity coming.
Q. What more do I need to begin trading DELTA OPTIONS?
A. Start by paper trading. Work on calculating DELTA. Watch two or three

markets and the results of DELTA trades over a few weeks. While youre
doing this, open your account with a brokerage firm, and use a broker who
understand options. Most brokers will know what an option is, but most do
not understand DELTA trading. If they do not understand it, dont trade with
them. Options trading can be complex, and while you are learning, having a

good broker will help. Look for a broker who can help calculate the DELTAS,
and who will help watch the markets with you. Options trading is one area of
futures trading where having a knowledgeable broker really helps.
Q. How much money do I need to trade with the DELTA OPTION

strategy?
A. You can start trading with as little as $1,000, but I suggest $2,500 or
even $5,000. This money must be risk capital. Futures and futures options
trading is highly speculative, and while large profits are possible, so is the
loss of your capital. While you may be lucky and make a large profit on your
first trade, you might also be wrong and lose your money. Never put all of
your capital into one trade. Limit your risk on any one trade to a quarter or
less of your risk capital. Many successful traders make money on only one
out of every four or five trades; their profits are just much larger than their
average losses. To accomplish this, they limit their risks on every trade, and
when they do make profits, they protect them.
Q. What is the role of a broker when I trade options?
A. It is essential that you use a broker and a brokerage firm that

understand options and DELTA OPTION trading. Options are not very well
understood by the majority of brokers, no matter what they might claim. Your
broker should be able to rapidly tell you the DELTA on any option you are
interested in. He should have this information available on a computer in his
office. While you can calculate this easily, it is easiest and quickest to just
ask the computer.
Additionally, some brokers charge very high commissions for option

trades, and some charge a commission both to enter and to exit the position.
DO NOT work with a brokerage firm that charges a commission to both
enter and exit an option trade!! In DELTA OPTION trading you will frequently
be trading more than one contract, and commissions could become very
expensive. You should pay only a round-turn commission, which means
ONE commission to both enter and exit the trade.

Q. What more do I need to begin trading DELTA OPTIONS?
A. Start by paper trading. Work on calculating DELTA. Watch two or three

markets and the results of DELTA trades over a few weeks. While youre
doing this, open your account with a brokerage firm, and use a broker who
understand options. Most brokers will know what an option is, but most do
not understand DELTA trading. If they do not understand it, dont trade with
them. Options trading can be complex, and while you are learning, having a
good broker will help. Look for a broker who can help calculate the DELTAS,
and who will help watch the markets with you. Options trading is one area of
futures trading where having a knowledgeable broker really helps.
Q. How much money do I need to trade with the DELTA OPTION

strategy?
A. You can start trading with as little as $1,000, but I suggest $2,500 or
even $5,000. This money must be risk capital. Futures and futures options
trading is highly speculative, and while large profits are possible, so is the
loss of your capital. While you may be lucky and make a large profit on your
first trade, you might also be wrong and lose your money. Never put all of
your capital into one trade. Limit your risk on any one trade to a quarter or
less of your risk capital. Many successful traders make money on only one
out of every four or five trades; their profits are just much larger than their
average losses. To accomplish this, they limit their risks on every trade, and
when they do make profits, they protect them.
Q. What is the role of a broker when I trade options?
A. It is essential that you use a broker and a brokerage firm that

understand options and DELTA OPTION trading. Options are not very well
understood by the majority of brokers, no matter what they might claim. Your
broker should be able to rapidly tell you the DELTA on any option you are
interested in. He should have this information available on a computer in his
office. While you can calculate this easily, it is easiest and quickest to just
ask the computer.
Additionally, some brokers charge very high commissions for option

trades, and some charge a commission both to enter and to exit the position.
DO NOT work with a brokerage firm that charges a commission to both
enter and exit an option trade!! In DELTA OPTION trading you will frequently

be trading more than one contract, and commissions could become very
expensive. You should pay only a round-turn commission, which means
ONE commission to both enter and exit the trade.
WORKBOOK EXERCISES
Work through each problem before examining the answer.
1.The DELTA of a Gold CALL option is 0.35. If the Gold price increases by
$10 per ounce, how much will the PREMIUM of this CALL option increase?
Answer: A DELTA of 0.35 means that for every $1 increase in the Gold
price, there will be a $0.35 increase in the option. If we multiply the DELTA
times the change in the price of Gold, we will get the expected change in the
price of the option. In this case, multiply the DELTA of 0.35 times the change
in the price of Gold, $10, and you will get the answer of $3.50. From a $10
increase in the futures price, the PREMIUM of the CALL option with a DELTA
of 0.35 should increase $3.50.
2. We are interested in trading a Silver PUT option. We need to calculate

the DELTA for a series of STRIKE PRICES. On September 1, the December
Silver contract is trading at $7 an ounce. The 700 STRIKE PUT is trading
at $0.23 an ounce, and the 675 STRIKE PUT is trading at $0.12 an ounce.
On September 2, the December Silver contract is trading at $6.90 an ounce.
The 700 STRIKE PUT is trading at $0.28 an ounce, and the 675 strike PUT
is trading at $0.15 an ounce. What is the DELTA of the 700 STRIKE PUT?
What is the DELTA of the 675 PUT?
Answer: The DELTA is calculated by dividing the change in the option

price by the change in the futures price. Calculating the DELTA of the 700
STRIKE PUT first, the change in the option price is 0.28 - 0.23 = 0.05. The
change in the futures price is 7.00 - 6.90 = 0.10. The DELTA is calculated by
dividing 0.05 by 0.10 = 0.50. The DELTA of the 700 STRIKE PUT is 0.50.
For the 675 STRIKE option, the change in the option price is 0.15 - 0.12 =
0.03. The change in the futures price is again 7.00 - 6.90 = 0.10. The DELTA
is 0.03 / 0.10 = 0.30. The DELTA of the 675 STRIKE PUT is 0.30.

3. A Swiss Franc PUT option has a DELTA of 0.27. The price of Swiss
Francs falls from 68.50 to 68.10. Will the value (PREMIUM) of the PUT
option increaser decrease? How much?
Answer: The PREMIUM of the option will increase. This is a PUT option
which means that a fall in price makes it more rise in price will make a CALL
option more valuable. The DELTA of the option is 0.27, and the price change
of the futures contract was 0.40. Multiply the DELTA by the change in the
futures price to get the change in the option PREMIUM: 0.27 x 0.40 = 0.11.
The PUT options PREMIUM will increase by 0.11.
4. A Swiss Franc futures contract controls 125,000 Swiss Francs, and

every 1.00 change in the value of the futures or option contract is worth
$1,250. What was the dollar value increase in the PREMIUM of the PUT in
question #3?
Answer: The PREMIUM increased by 0.11. A 1.00 move is worth $1,250.

Multiply 0.11 x $1,250 and we find the dollar value of this 0.11 increase is the
PREMIUM of $137.50.
5. The June Gold contract price decreased from $486 an ounce

yesterday to $480 an ounce today. The 500 STRIKE CALL option PREMIUM
decreased from $5.85 to $4.25 an ounce. What is the DELTA of this CALL
option? There are 100 ounces in each contract. What is the dollar value
change in the option PREMIUM?
Answer: The DELTA is calculated, again, by dividing the change in option

price by the change in futures price. The option price change is $1.60 (5.85 -
4.25 =1.60). The change in futures price is $6.00 an ounce (486.00 - 480.00
= 6.00). Divide 1.60 by 6.00, and we obtain the DELTA, 0.27. Each contract
is for 100 ounces, and each $1.00 per ounce change has a dollar value of
$100.00. This $1.60 an ounce change in the PREMIUM of the option has a
dollar value of $1.60 an ounce x 100 ounces, or $160.
6. June Deutsche Mark futures are trading at 56.50. We want to initiate

a long position, and think there will be a substantial increase in the futures
price. There is an international meeting coming up which is expected to
change currency alignments, and although we think this will result in an
increase in D. Mark values, it is possible that there will be a sudden collapse
in prices if the meeting goes badly. This is a perfect opportunity for a DELTA

OPTION trade. We calculate the DELTA of the 58 strike CALL option to be

0.33. We want to buy several CALL options so that the total initial DELTA of
our position is about 1.0. How many CALL options should we buy?
Answer: The answer is three. Each option has DELTA of 0.33. If we buy
three CALLS the total DELTA of the position will be three times 0.33, or
about 1.0. With a DELTA of 1.0, every dollar gain in the futures contract will
result in dollar gain in our total options position (33 cents on each of the
three options).
7. Each of the CALL options in question #6 is selling for $850. How much
will it cost to establish the total position? What is our maximum risk on this
position?
Answer: We are buying three options at $850. Our total cost is $2,550.
This is also our maximum risk. We can only lose the amount we have risked,
nevermore. In practice, we should try to limit our risk to one-half of the
amount paid for the position, or about $1,275. If the value of our position
ever decreases to this amount, we should exit the position and take the loss.
8. The meeting mentioned in question #6 concludes, and the price of D.

Marks moves up rapidly, as we had hoped. The price quickly reaches 58.50,
and we calculate that the DELTA of each of our options has now increased to
0.60. What is the total DELTA of our position now? For every dollar change
in futures contracts, how much will the value of our options position now
change?
Answer: We have three options, each with a DELTA of 0.60. The total
DELTA of our position is three times 0.60, or 1.80. Every dollar change in
the future swill result in a $1.80 change in the value of our DELTA OPTIONS
position.
9. If prices continue to increase, will the total DELTA of our position

continue to increase? What is the maximum value it can reach?
Answer: The DELTA will continue to increase. The maximum DELTA of

any option will be 1.0. This occurs when the option is way in-the-money, that
is when D. Mark prices far exceed the STRIKE PRICE of our options. The
maximum DELTA of our position would be three times 1.0, or 3.0. At this
point, every one-dollar change in the futures contract value would result in a

three-dollar change in the value of our options position. We would essentially

own three futures contracts.
THIS MARKS THE CONCLUSION OF THE COURSE.

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Bringing Commodities and Futures Research, Data,

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US Economic Previews with expert analysis on Stock Indices, Interest

Futures Market Service -emailed every Thursday evening. In depth

Professional traders and financial institutions have the fundamental

THE FUTURES MARKETS BEST-KEPT

DELTA, The fourth letter of the Greek alphabet, [] represents

Be aware that investment in commodity futures and options for

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To start with, we must learn some fundamental principles about futures

LEARNING THE ABCs OF OPTIONS

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Of course, this option is going to cost us something. As with everything

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 7

THE SIX WORDS

DEFINE EACH OF THESE WORDS:

OPTIONS TRADING: BACK TO GOLD

PUT AND CALL

We would, of course, wish to buy a CALL option. A CALL gives us the

STRIKE AND PREMIUM

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 8

If we look in Investors Business Daily or The Wall Street Journal, we

STRIKE AND PREMIUM

If we look in Investors Business Daily or The Wall Street Journal, we

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 9

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 10

Under circumstances where VOLATILITY is low, the person selling the

Either way, if prices actually do reach $480 an ounce, we can exercise

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 11

In answering this question always remember: TIME IS MONEY! The

The EXPIRATION DATE of each option is set by the exchange where

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 12

FACTORS THAT AFFECT THE PREMIUM BEFORE

If only a few days remain until EXPIRATION, options with a STRIKE

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 13

WHAT HAPPENS AS EXPIRATION APPROACHES

Some options will be in-the-money as EXPIRATION approaches. For

For each trading month of a futures contract, there will be a number of

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 14

THE SIX WORDS

DEFINE EACH OF THESE WORDS AGAIN, AND MAKE

THE MAGIC OF DELTA

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 15

which works out to a total dollar cost of $250.

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 16

PRICE. The PREMIUM, or value, of the option has increased. If we look at

HERE IS THE KEY FORMULA FOR CALCULATING DELTA:

MAGIC IN THE AIR

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 17

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 18

I have enclosed a graph of DELTA values to illustrate how DELTAS

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 19

CALCULATING DELTA THE EASY WAY

Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 20

DELTA OPTIONS TRADING

We started out by saying that every time we invest, our goal is to

What would have happened with a DELTA OPTION trade instead? It is