On this episode, Mark and Dan discuss:
- Whether our listeners are a buyer or seller for November SOUN calls
- Whether we think that we will see an October surprise that impacts the election
- What happens to the options when a stock gets delisted?
- Backtesting going long monthly straddles on the SPX
- Buying ATM verticals in momentum stocks
- American vs European options exercised on/after expiration day
- And much more
Episode Highlights:
- Listener Mailbag: Responding to questions on SPX straddles, momentum stocks, and the peculiarities of Delta for long-term options.
- Trading Tips: Discussion on managing risk when trading call verticals and the practicality of legging into butterflies for credit.
- Market Insights: Analysis of American vs. European options and why the latter’s structure often benefits traders.
- Book Recommendations: Dan’s book, Trading Options Greeks, available on Kindle.
- Community Spotlight: Shoutouts to engaging handles like “Nan Shucks” and advice on embracing structured strategies.
Key Topics:
- SPX Straddles: Viability and limitations for long-term strategies.
- Call Verticals: Using them in momentum stocks to manage risk and maximize gains.
- Delta Nuances: Understanding why out-of-the-money options can have greater than 0.5 Delta.
- Managing Risk: Why predefined strategies matter for long-term success.
Brought to you by Public.com
TRANSCRIPT
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Fall in blue.
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All right, everybody.
That music means we are back once again.
It is time to dive on into Education Wednesday with a program known around the globe as the old OBC.
My name, of course, Mark Longo from the optionsinsider.com, as well as from the network upon which all of you folks have been mainlining.
Allow me to invite you to the newest doubleheader on the network.
So come back after this show.
If you’re listening on demand, as I know most of you are, just hit next on your device of choice.
That is, of course, if you’re subscribed to the full network.
You should be, after all, by this point.
Because that will also get you the futures rundown.
And, man, we tackle a lot of intro to futures concepts.
We have a whole segment called Futures 101 there because there’s a lot of nuances in all of these contracts.
This contract size is because that’s how many bushels will fit into a rail car.
All kinds of weird stuff.
This tick size is over here.
It’s crazy.
It’s wild.
It’s fun.
Judging by the feedback, you folks and the numbers, you folks are loving it.
So glad to see that.
So yet another reason you should be listening to the full network.
And wherever you get in the content, make sure you throw a like a star a comment.
It does help new folks listen and discover the show just like Mikey did.
Mikey, Mikey’s a man of few words.
In fact, zero words.
He put in what is effectively, you know, the emoticons for smiley face.
That’s what he put in.
This is review.
So five stars and a smiley face.
So you know what, man, a few words.
I can appreciate that, Mikey.
Thank you to you and everyone else takes the time to rate and review us out there.
And of course, if you want to go above and beyond, you want to join the pro Q and A’s has had another awesome one yesterday with the folks over there at Prosper as well as, of course, options, oddities every Friday.
Live streams, giveaways, all kinds of fun.
The options insider dot com slash pro is the place to go as we go around the horn and see who’s joining us today.
Once again, he keeps the streak alive, beaming in from the options Mecca known as Frankfurt.
He is the black headed one himself.
Mr.
Dan Passarelli from Market Taker Mentoring with the cool kids called mmm to mmm.
Mr.
P, how go things in mmm to mmm land these days?
Pretty splendid.
Mark, everything is going just gosh darn swell.
What’s the hot thing?
What do the kids want to know about over there at MTM there now?
Well, there’s this new thing called the hula hoop.
Oh, and I hear that Slinky is doing doing gangbusters as well these days.
You know, hula hoop and Slinky baby, you got to cover with kids.
I’ve never heard of this Slinky thing.
Maybe we have a special segment on the show to dive deep into it as we keep on rolling listeners right on into a little bit of the old mail call.
Time to look at questions submitted by our listeners.
All right, everybody.
Welcome to the mail call the portion of the show where you folks take the range, your questions, your comments.
And Dan, that’s how you could tell we have our fingers on the pulse of the youth when we’re throwing out all the hot stuff, the hula hoops and the Slinky.
Sir, what do you say?
Yes, we’re cutting edge cutting edge over here, Mark.
I hear poodle skirts, all the rage with the girls as well.
You know, beehives, you know, it’s a hot time out there on the teen scene, which we know a lot of our listeners.
I’m cracking myself up here on the show.
All right, let’s see if your mail, your questions crack us up here on the show this week.
Listeners, let’s go see what you folks had in store for us last week.
First pay off some of those.
We had some funky ones last week.
Our actual question of the week last week was we’re a month out from the election.
Lot still has to unfold between now and November 5th, of course.
But when the dust settles, where do you think VIX is going to open on Wednesday, November 6th?
We gave you four ranges around here, 18 to 22, which is, of course, where it was when we posted this a week ago, kind of where it still is now.
A higher 22 to 26, still higher north of 26 or back down below 18.
Dan, I believe you were feeling your optimistic self.
You put on your happy hat because you said you think things are going to calm down.
It’s going to be back down below 18.
And our audience pretty much agreed with you.
38.7 percent say, yeah, they think when the dust settles, when the smoke clears on Wednesday, November 6th, VIX will be back below 18.
So Dan, our audience agrees with you.
What do you think?
Yeah.
I mean, to be clear, I said that I was hopeful that that would happen.
Yeah.
Crazy, crazy world full of a lot of crazy people these days.
But yeah, I’m glad that that’s the consensus because, you know, that probably means people are the majority of people are not crazy.
Well, we could hope.
Sometimes I wonder, but the audience of this show, clearly and insightful and intelligent and decidedly not crazy bunched in.
All right.
And then let’s see.
Nineteen point four percent of you chose still higher north of 26.
Twenty nine percent said 22 to 26.
So still some froth.
I could certainly see that being an outcome.
And then twelve point nine percent saying around here.
Eighteen to twenty two.
Keeping it on the election, Dan, we were debating this with our buddy Mr.
Dr.
Vicks on BallViews.
So he put it out to the full audience.
They are the ultimate arbiters every day.
Kind of want to play it out for our audience here as well.
We said, do you think we’ll see an October surprise that impacts the election?
Very simple.
Yes or no.
Dan, what is your vote?
And we think our audience came down.
No, hold on.
Is the spirit of this question like a political surprise?
Like, you know, Tom Selleck is going to replace Trump for presidential candidate or something?
I would be interesting.
I might be down for a little Magnum PI on the campaign trail.
Hawaiian shirts, sweet old school 80s cars, a rocking soundtrack.
You know, now I’m excited.
Now I want that.
I want Tom Selleck on the ticket.
Thank you for distracting me, Dan.
But but I digress.
Yes.
This is something that impacts the election and for purposes of our audience.
Also the market, sir.
Um, geez Louise, I don’t know.
I mean, I would say not an out of the ordinary surprise.
I mean, the answer is yes, because there’s crazy stuff happening every day.
But I mean, like a real material surprise, like, you know, major surprise.
I don’t know.
I mean, I don’t think so.
I hope not.
I think I think I hope not.
I’m just picturing the Hawaiian shirt, that rockin theme song.
Doo doo doo doo.
You know, a helicopter maybe comes in in a helicopter and then he rides around in a suite.
What did he ride?
Testarosa was Mammy Vice.
He had some sweet car too.
They all did.
Everybody in the 80s.
I don’t care if you were unemployed, homeless man.
You had a sweet car and every show on the 80s.
Our audience agrees with you, Dan.
73.7% say yes.
They think something something is afoot.
Something is out there.
We’re waiting to see a no 26.3%.
Now impacts the election is a big thing because we didn’t really see one last time that impact of the election.
The last time we really saw one of these was back in 2016 as you’ll recall, Dan, with the whole Hillary email scandal about a week or so before the election that really seemed to tilt the polls in Trump’s favor.
So do they have something else up their sleeve that could shake up the game like they did back in 2016?
I guess we’ll see.
But our audience, a deeply skeptical bunch.
They’ve been around the block a time or two and they expect to see something up their sleeve.
Since we’re saying on the election, this one’s.
This was kind of ridiculous, but we had to talk about it.
We profiled this paper on our option block show last week.
Someone Dan bought 50,000 of the November 2535 call spreads in everyone’s favorite name, DJT for $2.38.
We said at that level, are you a buyer or a seller?
And our audience was a seller.
63.6%.
Just like maybe the answer should have been by Dan, because it stocks up another 330 today or 12%.
Now, this stock doesn’t move according to any economic news.
It moves on the whims of the political market.
So a completely different beast.
So obviously there’s some political tinge to this response as well.
But yeah, it’s on the rampage today.
So apparently this person knew what they’re up to.
238.
I got a feeling you could sell it for a wee bit more than that right now.
So I guess the answer there was yes.
Was a buyer even though our audience sold the hell out of it.
Let’s get away from political stuff, Dan.
Let’s go out to another silly one that we’re kind of is just just expiring right now as we’re talking, Dan.
This was kind of our late second half of the week question that’s running into today.
We asked you folks out there, everyone’s favorite soundhound.ai.
This time on our show last week on Thursday, I believe on the option block, we said, somebody really loves the upside.
They bought twenty three thousand three hundred and eleven of the nove five half calls for forty cents at that price.
Are you a buyer or seller?
We gave you one extra factoid, Dan.
We said, by the way, in case it informs your decision, earnings are on November 7th.
And just just a nugget, Dan, worth noting today, looks like they are coming for soundhound.
It was down to five eighteen.
So the stock was five forty.
So they were almost at their strike.
In fact, they got up to five fifty five.
Yesterday.
So they blew through that strike and now they’re back down.
What do you think our audience is saying, Dan, are they a buyer or a seller?
Oh, boy.
That is kind of a tough one.
I mean, this is this one is a short squeeze candidate is what this one’s all about.
It’s got a twenty five percent short interest.
Twenty five percent of its float is shorted.
So I mean, people who watch that kind of thing.
And you see all that big volume of calls like a lot of times, these things become self-fulfilling proxies because, you know, traders buy the calls, market makers sell the calls, consequently buy the stock and bust through the twenty one day and fifty day moving average like it did four days ago.
And you know, you can see follow through and a short squeeze materializes.
I don’t know.
I’m thinking people are going to say they’re they’re a buyer.
That is the case right now.
Almost exactly two thirds.
This poll goes out in about an hour or two.
Sixty four point seven percent.
So they want to buy it.
Thirty five point three percent.
So they want to sell it.
By the way, Dan, just pulled it up.
These calls had a nice run, obviously, because the stock broke through the strike yesterday.
They are back down.
They’re forty one at forty two right now.
So if you’re listening to this, listen, if you like this trade, they’re pretty much back to the same price they were late last week when we first profiled this trade.
So if you’re down for this, I’m just saying it’s right about in that ballpark.
So you can still scoop these up.
If you don’t like them, you could sell them or avoid them, whatever the heck you want.
But an intriguing one out there.
And Dan, you know, it’s always intriguing.
It’s your question of the week.
So let’s get to it.
And now it’s the moment you’ve been waiting for.
It’s time for the market taker question of the week.
All right.
Seeing your P what you got for us, sir.
All right.
So what happens to the options when a stock gets delisted?
So that can be interesting.
And I always want to qualify it whenever there is any sort of corporate action.
The first thing you’re going to do is you’re going to email investor services at the OCC dot com and you’re going to ask them for the definitive answer because they decide what happens to the options.
But here’s what typically happens when a stock gets delisted, delisted, then the options that day expire.
So if there’s leaps listed on them that are supposed to expire two years from now, but the stock for some reason gets to list it, you know, I mean, it’s usually a much longer process.
But, you know, the stock gets delisted.
Then expiration comes early because those options can’t exist if there’s no underlying for them to trade on.
So at the end of the day, sir, go to the OCC.
That is kind of the starting point for all these queries.
And then from there, listen, type in your symbol.
Chances are they have a circular explaining all this.
Yep.
And from there, you can go hit up Dan over there in the land of MTM, Dan and say, Professor AP, what happened to my symbol XYZ?
It is no longer trading.
And Dan will laugh at you and say, Be gone, peasant.
I’m just Dan would never say that.
I’ll give my Sergeant Passy voice.
Yes, Sergeant Passy blow the whistle right in your face.
As we’re talking about Dan, this next question is for you.
This comes from Anders.
He says is Dan’s book available on Kindle?
Well, the legendary, the infamous trading options, Greeks, Mr.
P.
Is it available on the old Kindle, sir?
It is indeed available on Kindle.
So yeah, pick it up on.
I don’t know.
I think Amazon’s probably the cheapest place to get it.
Well, they are pretty much the home of the Kindle, right?
So I would imagine they would probably be the best place and all the visuals, all the charts.
Is it still there for the folks as they just get it in the digital format, sir?
Oh, yes.
If you recall right now, I know it’s been a while since you put that book up.
If you had to recall right now, one visual one chart that you put in there, you said, you know what?
That one was good.
Chef’s kiss.
That one really tells a story worth a thousand words.
Which one stands out to you, sir?
Oh, my God, dude, I wrote that book like a long time ago.
Testing the brain cells that are left, sir.
Yeah, I don’t know, man.
I’m sure there were I’m sure there was something that I heard that P&L graph on IBM was pretty sweet.
Yes.
Yes.
You know, I’ll tell you what, probably the the synthetic relationships, because that’s something that isn’t really that covered because in a lot of ways it’s not that like practical.
Like you’re not going to go intentionally trade synthetic relationships, but it’s really helpful to know and understand.
So, you know, I don’t know, maybe that.
And then, of course, that sweet, sweet IBM P&L graph listeners check that one out.
The colors.
I mean, the color gamut alone is worth the price of a mission, especially if you have one of those high end iPads, you can read it on or the Kindle, you know, not the Kindle so much with the iPad.
You read it on there, the iPad Kindle app.
The colors pop.
Damn, it’s all I’m saying.
It’s all I’m saying.
All right.
Let’s keep rolling.
We’re having all kinds of fun on the show today.
Listeners hope you are to judge it by the numbers.
You folks seem to be having a good time with the show.
Keep these questions coming.
We love when you folks play along.
Just like next up, we’ve got M City.
That motor city, maybe he’s a Detroit fellow.
I don’t know.
Either way, he wants to know, has anyone back tested going long monthly straddles on the SPX?
The market has rallied so much, I would think it’s doing pretty well.
Dan, you know, we’ve been relatively dismissive for the most part on this show.
I’m just going out and gobbling up straddles.
That said, you’ve been taking a little bit of a warmer tone to them of late, in particular, your semiconductor straddles.
What do you have to say here for M City?
He wants to know, do you think going long monthly straddles on the SPX could be a viable long term strategy?
Well, I mean, long term strategy, the answer would be no, at least back testing, because historically the implied volatility, there’s what they call a risk premium on options.
That is, it’s basically like insurance companies have actuaries decide like, okay, if somebody, if I’m insuring a million people and this percentage are going to crash their car, this is what it’s going to cost us, but they don’t sell insurance at the price it’s going to cost them.
They have to make money.
So that’s kind of what it is with options.
There’s an insurance premium, they call it a risk premium.
It’s historically, since 1987, traded overall on average, not always, and that’s important, overall on average at a higher price than what it should be, which just, it’s a sleeping pill.
It allows people to sleep at night knowing that they can have that protection.
But lately there have been instances where implied volatility has been under priced.
Right now we’re a little more hard pressed to find examples of that today.
I suspect that probably next year, five years from now, 10 years from now, we’ll see that risk premium come back on a more regular level.
So yeah, I would say it’s pretty unlikely that monthly straddles on SPX would work.
Yeah, I concur.
I’ve been on record saying, you know, I’m not a huge fan of just going out and loading up on the straddles.
I mean, obviously we used to have to do it as market makers, but we, I’ve said before, we had the gamma scalping in our back pocket, much more favorable account treatment as well and margin treatment to be able to defend those straddles until we could actually take them off and make some money on them.
But your question also asked specifically, has anyone back tested this?
The answer is yes.
I did actually just discuss this with the king of the back tests himself, Mr.
Matt from ORADS, Dan.
We discussed this exact thing about long straddles.
And I took the dim view of it saying, you know, I don’t think these really work.
And he, after looking at all his data agreed, he did say, Dan, there’s one caveat that does work and it’s kind of a cheat when you think about it.
He said the straddles that had the most long deltas.
So obviously, listen, as when you’re buying a straddle, you’re buying one option, you’re buying another.
Theoretically, if it’s straight at the money, you’re buying a long 50 delta call, you’re buying a 50 delta put that is negative, they should cancel out, you should have zero delta.
What really happens in practical terms that usually have some residual leftover delta, maybe the delta is a little bit positive, maybe the delta is a little bit negative, you know, long five, negative three, whatever the case may be.
What he found, Dan, was that the straddles that had the most residual long deltas, guess what?
They feared the best.
Why?
Because the market’s been mostly up for the better part of the last year.
So it’s kind of a cheat.
But if you want to be long delta bias, the straddles, it could work over time, Dan.
But again, you’re really just buying stock at that point.
You might as well just go out and just buy the S&P.
That’s what you want to do.
That’s your game plan.
But a little bit of deltas in a straddle and maybe it works out.
I think there’s better ways you could do it.
But yeah, in general, I would say no.
So Dan, what do you think about that?
I think that’s a cheat.
What do you think?
Well, yeah, it actually kind of relates to another question I were talking about before.
But yeah, I think that’s kind of a cheat because it’s in that that’s a different use of a straddle, I would say, you know.
And and I guess if you’re just playing it because it has a high delta, you’re really doing yourself a disservice by even owning that put anyway.
Yeah.
Yeah.
What are you doing buying that put?
There’s no reason to.
Right.
So yeah, you’re not here for a straddle.
You’re here for something else.
I really want that sweet straddle with the eight delta.
Dan, that really gets me gets me excited to spend all this capital for eight deltas.
But I digress.
All right.
Just cracking myself up on the show today.
Magnum, eight deltas, your sweet, sweet IBM P and L.
I’m having a good time, Dan.
If no one else is, at least I’m having a good time on the show.
I’m also having a good time with this next handle.
I like this nan shucks, Dan.
Listen, we all know nunchucks.
This guy is nan shucks.
And maybe it’s a grandmother who swings nunchucks.
I kind of like that image.
A grandmother who’s just kicking butt with nunchucks.
I like I like everything about that.
Nan shucks.
Nan shucks wants to know, sir.
Yes, sir.
Oh, they’re buying in.
They’re buying into the to the military theme, Dan.
Sir.
Yes, sir.
Loving this show.
I’m all in on options.
And so far, my trades have worked out well.
I’ve been sticking to mostly buying at the money call verticals in momentum stocks like the aforementioned SoundHound adds some momentum until recently others.
If the stocks run, if the stock runs, I close the spread or sometimes I’ll roll or leg into a butterfly for credit.
Do the drill instructors approve this approach?
Any upgrades or tweaks for this raw boots?
Sir.
Yes, sir.
I like it.
I like it.
Keeping the theme alive.
Dan, I tried to do that in the first few episodes of the show with the the gravelly drill instructor voice and yelling everything.
I quickly realized my voice could not survive a dozen episodes, let alone over a decade of doing that.
So I had to withdraw.
I’m glad the listeners are keeping it going.
And at the money call verticals in momentum stocks.
If the stock runs, you either close it or you leg into a butterfly for a credit.
What do you think about that approach, sir?
Yeah, I like it a lot, man.
I really love it.
The the legging into a butterfly for a credit under the right circumstances.
I’ve done that before myself.
That under the right circumstances, that can be really great.
The one thing you didn’t mention, nandjucks, which maybe you know, you just didn’t think to mention it.
But I hope it’s on your mind is what your plan is for if it goes against you as well.
We always want to know what to do in that case, because as we all know, sometimes momentum stocks fizzle out and things don’t always work out just perfectly.
So as long as you’re managing that risk well, on the other side, I love it.
I think it’s great.
I’m still hung up on the grandma with the nandjucks.
I think that’s just that’s just an awesome image.
If we had a cover art, we could change for that to that for this week.
We should do that.
Produce just nandjuck grandma.
But yeah, I love this.
I love everything about this.
I think this is great.
I think he or she is.
I’m going to assume a she because it’s a grandma.
It was wielding nandjucks in my mind.
She is kicking butt literally and figuratively with this.
As long as you do your due diligence, you’ve identified these momentum names, quote unquote, that you like.
Yeah, buying the vertical.
So you’re reducing your outlay.
I like that approach as opposed to just buying the call.
You’re giving yourself a little bit more table stakes, a little bit more time to kind of sit at the table until the stock makes the run.
If the stock explodes, you close it out or you do the old legging into the butterfly.
I like Dan like that second part a lot as well.
Yeah, some some thoughts about if it doesn’t work against you, but it sounds like you said it’s worked out well.
So it sounds like you’ve had a decent track record with this so far.
So yes, you get the double drill instructor seal of approval and plus bonus points for your sweet, sweet handle.
Are you a grandmother who uses nandjucks?
Now I have to know right into us again and and let us know as we keep rolling to the excuse me, much less exciting handle.
Let’s hope his question backs it up.
You can’t fault the handle.
That just is hard to beat nandjucks.
RBJ says, so if I have an American option, then I can exercise it at any time.
All in quotes, even after the close on expiration day.
While if I have a European option, then I can only exercise it after the close on expiration day.
Is that pretty much the gist of it?
Well, short answer.
Yes.
Seems pretty silly to me.
Why would you want an option that doesn’t let you exercise the option part?
Isn’t that pretty much the name of the product?
Yes.
You know, that’s where the name comes from.
The rights, but not the obligation to exercise and actually buy the underlying or sell it at that particular price by that particular time.
Yes, you’re right.
That is inherent in the naming of the product.
But remember, we talked about this before.
It sounds on the surface.
Yeah, man.
I don’t either have this option that gives me all these options, quote unquote, to do whatever I want throughout the lifespan of this product versus this option that does it again.
That on the surface makes a lot of sense to people.
Then, of course, as we’ve outlined here, it almost never makes economic sense to actually do that.
There’s no reason you’re always better off outside of the rare scenarios where there’s a dividend in play that is worth more than the remaining extrinsic value on that strike.
Outside of those rare scenarios, it never makes economic sense to do that.
So is it nice to have the option?
Yeah, I guess.
But if it makes no sense to do it, if you’re actually hurting yourself and costing yourself money by doing it, do you really want to do it?
On the flip side, if you’re selling these options, people like the peace of mind of knowing that, hey, this thing’s not going to come back to bite me any time during the lifespan.
I see a ton of paper now, Dan, going up in flex options now for this exact reason.
We’re seeing millions of contracts go up in flex right now because there’s a ton of these defined outcome ETFs out there that use options to construct these defined outcomes.
But guess what?
They’re using all these American style options and they don’t want to deal with this early exercise and assignment risk.
So they then go to the flex and they swap them for a European style because they don’t want this noise.
They don’t want this headache.
So there are millions of contracts in entire sub industry.
Every exchange right now is gearing up their flex like it’s going out of style because it’s printing money for this exact reason.
People want to get rid of this American exercise option and just deal with the European style.
So on the surface, it might seem like that.
But in reality, the lack of the any time exercise option is actually a beneficial thing to a lot of people, especially the premium sellers.
And for you, if you’re along the premium, it doesn’t make sense to ever really use it.
So I wouldn’t get too hung up on it.
Dan, anything you want to add on this, sir?
Yeah, I mean, you know, there’s a lot of use cases for options.
We can break those down into two categories hedging and speculating.
And I don’t know, I would go as far as saying I think speculating is probably a lot more common and whether you’re speculating, I mean, if you’re speculating, you’re almost certainly closing your option positions before they expire and never exercising, not wanting to take assignment.
And if you’re using that as a hedge, you’re still probably closing them before expiration.
So and just the numbers dictate that most options are closed before expiration.
So you know, most people don’t want to to get a sign.
I mean, you know, as far as an exercise you have control.
There won’t be any surprises.
But most people don’t want to get a sign because if you get a sign, you end up with a position that’s probably an adverse position and you go from an option position to what they call a delta one position, a hundred delta.
And now you’re just like, oh, I got assigned.
I hope it doesn’t go up or I’m in trouble.
If it goes down, I get lucky and that’s a terrible position to be in for an option trader.
And so, you know, the thing about European options is that’s not going to happen.
You’re not going to get surprised assigned.
And so you just manage your risk by closing it before expiration.
And you know, you never have to worry about that added risk.
All right, Dan, we got one more.
That’s kind of more of a 201, maybe even a 301 type question, but it delves into the Greeks.
I thought it would be interesting.
It actually came into our option block program and we discussed it at length there with the Flowmaster.
So if you want another deep dive into this person who sent it in, Brandon, I’m assuming you listened to it already because you sent it into that option block show.
But Dan, I thought it’d be interesting to repeat this and discuss it a little bit on this show as well.
Obviously, the OBC audience, a different, a unique butterfly audience.
A lot of them do just mainline OBC.
So I want to make sure that they have a chance to discuss this as well.
And again, it’s kind of nuanced.
So pay attention here, listeners.
But it’s interesting why I think a lot of you may encounter this as you start trading more options.
You might have this question.
So Brandon wrote in, he said, Hello, long time listener here.
First time questioner says I was looking at leap options.
And I noticed these again, the long term equity anticipation securities listener.
So longer term options.
I noticed that the out of the money Delta was greater than 0.5.
He says my example, until April 25 calls, he said those were over a 50 Delta.
And we did go check and we just came in a little bit.
We can change ago and they were indeed over 50 Delta, like a 53.
What is causing this?
I am familiar with the Greeks and it is always my understanding that Delta shows how in the money the contract is.
Thanks for the fantastic show.
Well, you’re welcome, Brandon.
Thank you for taking the time to write in asking such a thoughtful and nuanced question.
Dan, we’ve talked about before kind of debunking the notion that Delta is the precise probability of the option expiring in the money.
Mathematically, that is not the case.
It’s a good shorthand for it.
It’s in the ballpark, but it’s not going to be precise.
But what do you have to say here for Brandon who wants to know?
He’s kind of he’s kind of freaked out.
He’s like, why are these out of the money Deltas greater than 50?
Yeah, yeah, that’s a really good question, Brandon.
So here let’s let’s not get really fancy with the math because, frankly, the math with option pricing models and the byproducts of them, which are the Greeks, is really complicated.
So let’s just keep it in total.
Lay easy on the same term.
So it has to do with financial theory, right?
Like there is a something called the present value of money, which basically implies that if I have one hundred dollars today.
I can invest that at at least the risk free rate and that hundred dollars today would be worth one hundred and five dollars in a year if the risk free rate is five percent.
Right.
So that plays in with stocks conceptually.
If you’re going to hold those in those April of two thousand twenty five Intel calls for one hundred and eighty three days.
Well, I mean, if Intel just owned cash like they just sold all their buildings, all their chips and just sat on a pile of cash and put it into a high yield savings account or T bills or something.
They would they would earn money.
The company would be worth more in the future.
So in that regard, Delta is the likelihood of the option expiring in the money in the future.
Right.
Because the stock price will be higher in the future.
It should.
It should anyway.
And, you know, you probably do the math and the interest rate isn’t going to calculate exactly out.
And there’s, you know, all these mathematical nuances and such in there with American style options, et cetera, et cetera.
But, you know, that’s that’s how I conceptualize it.
I think that’s the easiest way to think about it.
Just think of the time value of money.
Yeah, that’s exactly it.
There’s a forward value that all these platforms have to use to generate where they calculate with interest rates and everything else.
Dan was just talking about the time value of money, where this stock will be by April of next year.
And that’s what you’re seeing reflected in those deltas.
If you really want to get nuanced in it, you can go into the synthetics and look at them and they’ll show you exactly what price they are pricing out.
But this is a great question.
Again, shows, Dan, that our listeners are taking it to the next level.
All right, Dan, that music means that’s all the levels for us today on the show.
Man, what a wide ranging show.
Let me see if I could just sum it all up in one sentence, Dan.
We had SPX straddles, then we had a Magnum PI, we had Nunchuck wielding grandmas, we have out of the money deltas.
I’ve lost track of all kinds of election madness and soundhound AI.
I mean, am I missing something, sir?
Did I forget anything?
Hula hoops and slinkies.
Oh, yes, hula hoops and slinkies is how he kicked it all off.
Man, what a journey we went on today listening.
Man, packed a lot of living into one show.
In the meantime, Dan, if folks want to pack a little bit more living, maybe in the land of MTM, where should they go?
What should they do?
Sure.
Come on over to markettaker.com and join free.
Just click join free up in the top right hand of our website there.
And you get access to our chat room.
We’ve got lots of free classes.
And we always do free live trainings.
In fact, I think I have one tomorrow night.
Head on over there and you’ll get an invite to it.
Ooh, free.
Like it.
Magic word.
Check it out over there.
Listeners, markettaker.com.
Don’t forget the second T for theta.
If you like things free or maybe even dare I say it, paying you, then head on over to public.com/options.
Bootcamp.
Yes, go to that URL.
Let some know that you are a listener of the show.
Keep some supporting the show that’s coming at you week after week for over a decade.
We’re also going to get SPX straddles and nunchuck wielding grandmas and all that fun.
Nowhere is the answer.
But head on over to public.com/optionsbootcamp.
Kick the tires and light the fires.
Again, it’s not just free.
If you’re active, they will actually pay you a rebate on your trades, which is pretty freaking cool if I do say so myself.
They also want your feedback on their brand spanking new options platform.
So tell them what you like, tell them what you’re using, tell them what you’d like to see them add because spoiler alert, they’re probably going to add it.
So that’s pretty cool.
So head on over to public.com/optionsbootcamp.
Keep supporting the show that’s been coming to you now for well over a decade.
And if you want more in your lives, stay tuned.
I’ll be back in a little bit for all of our pro folks who are listening live, theoptionsinsider.com/pro.
The place to go to access that.
For everyone else, just hit next on your device of choice.
I will be back with the newest addition to the network, the Futures rundown.
It’s a hot one.
It’s hot out of the gate listeners.
Glad to see so many of you are enjoying.
If you’re intimidated by Futures, it’s a little bit, oh man, I don’t know if I want to go down that road.
Trust me, check it out.
It’s worth your time.
We’ll ease you into it.
If you’re a little bit more savvy, we go a little bit into the weeds there as well.
All kinds of fun happening on the Futures rundown pretty much immediately after this show.
Tomorrow, of course, our usual doubleheader of the option block, our buddy, the Flowmaster, will be beaming in from the SIBO’s Risk Management Conference.
That should be fun.
Hearing all the latest in the world of volatility and hedging research should be kind of fun.
After that, we’ll be back with this week in Futures Options.
Friday, of course, volatility views and one more time for the pro folks, come back for a little bit of options oddities.
You like stuff like those Sound Town calls and everything else.
We got a whole show all about that fun stuff.
Heading out on the pro.
Then we’re back again next week on Next Education Wednesday, another episode of Options Bootcamp.
Stay safe out there, everybody.
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