This ThinkBack simulates establishing a long (bullish) option trade on 12-31-2020. Comparing buying a 60 Delta Call to a 30 Delta Call.
If I want to compare the actual Deltas I would have to purchase two of the 30 Delta Calls so that both positions start out with approximately 60 Deltas.
However, one of the benefits of buying the 30 Delta Call is that it’s much cheaper than the 60 Delta Call. In fact, it costs almost exactly 25% of the cost of the 60 Delta Call so I could buy four of the 30 Delta Calls for the same price as one of the 60 Delta Calls. By purchasing four 30 Delta Calls the position would then be long almost 120 Deltas for the same cost as 60 Deltas. More Deltas for the dollar!
Now we proceed with the simulation. The next trading day after 12/31 was 1/4/2021. SPY closed down 1.4% that day so the positions would have a loss. Below compare the loss of the two positions.
Below I jump ahead two days to 1/6. Notice that the profit is much larger on the 30 Delta options. You can see how the Delta values have changed as the price of SPY changes.
By 1/7 the difference in the amount of profit between the two positions is growing.
Below are the profits as of 1/8. I chose this day to Delta Hedge (DH) the two positions. By Delta Hedging a position I’m reducing the Delta (directional) risk as well as reducing the net cost.
Below shows the current profit (as of 2/2) of the 60 Delta Call after it was Delta Hedged. The profit would be $505. Perhaps even more importantly, since I Delta Hedged those long 362 Calls by selling the 368 strike Calls in the same expiry my net cost for the Vertical spread is minus $.61. That’s right, I would’ve owned a $6 wide Call spread for a $61 Credit.
Below shows the current profit (as of 2/2) of the 30 Delta Calls after they were Delta Hedged. The profit would be $1,128 and since I Delta Hedged those long 400 Calls by selling the 407 strike Calls in the same expiry my net cost for the $7 wide Vertical spread is minus $.01
Finally, this is what the risk profile for the 60 Delta Call would have looked like on 1/8 when the SPY closed at 381.26 and the Delta Hedge trade had been made. This is where it’s important to point out that even a position that has removed all of the initial cost isn’t risk free. In fact, there is no such thing as a risk free position! Risk is not measured by how much of the initial cost can be lost but rather how much of an open profit can be given back.
This is what the risk profile for the 30 Delta Calls would have looked like on 1/8 when the SPY closed at 381.26
Not only is there a big difference between the amount of profit but the reward/risk ratio is much larger with the 30 Delta Calls.