Why Delta Decides If Your Option Actually Makes Money

You already read the chart. I'll show you how to get paid for being right. >> He's the trader. I asked everything you're thinking. >> I'm Jake Sweeney. I went from not knowing what a short is to trading live under Gareth Soloway in just under a year. I just showed up and did the work. >> I'm Tabby and I'm learning in real time right alongside you. >> We're not changing how you read the chart. We're changing what you do the moment you are right. >> One chart, one concept, and one trade every day. >> From the chart >> to the chain. Let's get into it. >> Good afternoon. Happy Monday and welcome to the options conversion secret from chart to chain. My name is Jake Sweeney and today I'm joined again by a surprise guest. Miss Tabby is out of the office today. So, I have maybe a trader you've seen before. >> What's up, guys? It's Tabby Pierce here, a junior trader of Verified Investing. Really, really excited for this chart to chain experience. >> So, we have Lton Ho here, pro trader here at Verified Investing. And yes, he is joining today. He knows. How much do you know about options, Lton? >> I know a put is down and a call is up and time is bad. >> Okay, that's pretty good. time could be bad for the buyer, but maybe good for the seller. But we'll take that a step further as you continue to learn about options. But um Friday, guys, we we're today we're going to learn Delta and we kind of learned about the basics of Delta. We're going to be taking it a step further this time, going kind of a level two delta, maybe a little deeper, so we understand how it affects the buyer and the seller. So yes, Lton was perfect on that. a put. If you're buying a put, you want the the sentiment to go down. Yeah. >> If you want it to go up, you're going to buy a call. >> Now, why would you touch options in the first place, Lton? >> Because listen, stocks, some stocks are expensive and options are cheap and you can get more bang for your buck. You can make $10 million or you can lose it all. >> That is pretty spot-on. And yes, he was right about that most important thing. Stocks outright are pretty expensive. Say you want to buy a share of SanDisk outright. Um it's going to be thousands. With that you can get a options contract and with this yes it's so powerful. One contract controls a 100 shares. So now you can try and get some amplified gains and losses at a fraction of the price. Beautiful. Now with that today, what I'm going to be looking at before we delving into Delta is a setup on coherent co one of the semiconductor plays. Have you ever traded at Lton? >> I've written articles about it. I don't know if I've traded it. There's so many stocks I don't even remember. >> When you're trading though, especially in the live day trading room, you're always trading the semiconductors, sometimes even >> Soxel. M >> is that kind of your your ticker that you always like to trade? >> I do like to trade it quite a bit. I mean, I like it because uh it gives me both volume and volatility, so I can see big moves. >> Okay, 100%. And with that though, why do you like that leverage ETF, Sockhole? >> I just I just know it. I'm just um it moves a lot. I like >> he likes the volatility. So, he's he's going to have a hot seat here in the options market as that's what we're all about. All right. As I continue on, I'm going to go into the charts now and start my technical setup. >> And we're going to dive into the charts. >> All right, you guys heard it. All right, guys. I'm looking at Coherent today. Okay. And why is that? Because they report after or they report tomorrow going into Tuesday. And now just recent price action, they've had a sharp down move and having some sideways consolidation. This price action right here, guys, to me, this is bearish uh bearish price action. Even with this a sharp down move with sideways consolidation, this could be formation of a bare flag, which also continues a kind of gives a notion of price to move on down. Now, is the time to buy right now a call or a put? I would look to buy a put here because of just said price looks to break down and then even with that I want you to look at this white trend line right here. Okay. Now this white trend line this is from April 4th 2025 and as you see as price is coming into this level it finds buyers and support. price comes down to it right here in early November or of last year and got a bounce and then we have since not back to this in over a year for this trend line. But just with recent price action, we've now hit on this trend line four days in the past week. So just with frequent hits and price continuing to plunge down, I think this trend line is going to break. Okay. Now with that, do we get our do we look to buy a put or a call now on this setup? I want to kind of wait. I want to wait for confirmation on this. This trend line could give a bounce and price could bounce back up should coherent report a good earnings print. Okay. Now, where would be the zone I'm trying to buy? Well, one, I'm trying to have multiple factors. Okay. This is just a one factor trade right here of price sitting on this trend line, but we don't have a confirmation of a breakdown yet. Okay. Now, this with this, we could be patient and see, let's look at this dark blue line right here. There's this pivot shelf here coming in at 185. Now, if price came down, broke this trend line, I'm sure price would come down to this 185 level and find support. Now, I'm one to be I'm more of a patient trader and I like to have cheaper prices, especially before I buy something. So, with that also, if we wait for that 185 pivot area, we also have this Fibonacci 618. So, if you guys want to do this with me, you can anchor it here from this April 4th low. as we have as we anchor that, we're gonna drag it all the way up and we're gonna anchor it to this 44128 high. And that's going to give us a bunch of levels in between. So with that, if we go now to this teal price action, that's the 618 right here 195 to 185. So in that zone, that is when I'm looking to buy coherent at this cheaper price at this multiffactor support zone. So, for right now, I'm going to have to see how the chain is set up, if we're if we can find a position on this or if we're going to have to wait and and pass and wait for that earnings sprint to land. Thank you. >> And we're going to the chain. >> So, >> all right, guys. So, now that we have our setup, we're not going to go to the chain just yet. I appreciate that, Lon. We're going to start learning Delta and some options today. >> Sure. >> All right. >> And then we're going to go to the chain. >> Yes. That is spot on. >> Guys, I'm doing my best tabby impression. Not as attractive or knowledgeable obviously, >> but you're but you're still here and that's all that matters. >> It's true. I am here. >> Appreciate it. All right, Lton. So, have you ever heard about Delta? >> Delta, that's Greek D. >> Correct. Yes. Yes. So when it comes to options, >> try adults. >> Yeah, it's also a sorority. It could be a fraternity, too, depending on the sequence. I'm focused on the charts there. >> Okay. Okay. All right. >> So when you're thinking about delta, it's how much the options price moves when the underlying moves a dollar. So the underlying is like the stock coherent. Okay? So if my delta is at about 0.5 and it moves, coherent's going to add about 50 cents to my contract. Okay. If my delta on coherent is at 0.2 and coherent moves, then I'm going to add about 20 cents per se to my dollar. Yeah. But it does scale though. >> But for roughly every dollar. So if coherent if the delta was one and coherent went up a dollar my contract would $1 added to it. >> Yes. Um a delta of one though is going to be deep deep in the money. >> Okay. >> Okay. >> All right. >> So if we're looking at deltas for calls when you're bullish that's going to be 0 to one to positive one. Okay. Now, if we're going to the opposite way, we're going to a negative delta, that's going to be the put side. So, when we're having a bearish a bearish outlook on the chain, that delta is going to be negative. Okay. So, just to make aware of that. Does that make sense? >> Makes sense to me. >> Okay. So, does a higher delta len does that move more with price or does it move less? higher than one. >> Um, >> well, what do you mean? >> Just overall, does it is a higher delta going to be beneficial to the buyer or is a lower delta going to be beneficial? >> Well, it's zero to one, right? So, do you would think that the higher is better for a call and the lower is better for a put? >> So close. That that was that was close. So, for a call, yes, the higher the delta is the better, but on the put side of two, the higher delta is still better. >> Really? >> Yes. as a buyer. >> Okay. >> Okay. And so what kind of zones do matter when it comes to these deltas, you may ask? So when Tabby and I trade, we're usually looking at these setups with delta around 04 to 6 as buyers. And this could be negative or positive. That doesn't matter. So what we're trying to looking for that sweet zone. So yes. So I have this graphic here. This is where the buyers are going to this is where a lot of buyers live in this area. Okay, it's slightly at the money, in the money, and out of the money. Okay, now if we can pan back to me. So that zone point 4 to point6 kind of why it's because there's enough room in this area to profit. Okay, at the point kind of point 4 to 6. So it's super it's not overly expensive. say lot if we're buying deltas anywhere from 6 to 7 then these premiums are going to be more expensive >> so let's say you're buying a delta I I always hear about these big large gains on these options if you buy a delta of point two I I guess when would you sell it when your premium is like at 48 >> so it it really just depends depends on where you're at in the money and such. So that 0 2 is going to give you very little exposure. Okay. So that's why I'm looking I I like the around the point 4 to point 6 because it's kind of the happy place of exposure. And say if you get too little, I know I was kind of going to the up the upside first, but if it's so if that 02 is so cheap, the stock's going to move, but our options contract isn't going to grow. It's going to grow very little. Okay? That's why those cheaper um zero day options, weekly options, why they're so cheap and why they have little delta is because once the stock moves, you may not see the move that you're getting in the chain, >> but the delta can change over time. >> Correct. Yes. >> So like if you're significantly out of the money, if you buy an option significantly out of the money with a low percentage of it coming to fruition, your delta is going to be pretty low. >> Yes. Correct. That's why so pretty much what when you're getting those low cheap low deltas, you need a large large move to get to your to kind of for the options contact to grow. Otherwise, if you just get a small little move, it's not going to grow as much as you've seen, whether you're trading like equities and such as you normally do. >> Okay. >> Okay, >> makes sense. >> So, that's kind of the the happy place between that point 4 to 6. If we're going above that, we're paying for more certainty and we're going to pay a premium for that certainty being more expensive. Now, if we're paying for more expensive or break even is going to be farther. Okay? And then same to the downside. If we're looking at a delta, I mean from 0 2 to 3 around that area, it's cheap for a reason. Okay? So, if the option moves um if you're if the option if the delta is 0.2 two and coherent moves $2, then your options contract is only going to gain 40. Okay, make sense? >> Makes sense. >> Okay, so let's flip the script now. So, what about if you start selling premium? You really want to get going. So, where does that delta live? They're lower on those on kind of the array. Sellers like to have kind of a sweet spot of their delta is anywhere from 0.2 to 3. If we could throw that graphic back up so they can see. Yes. Kind of in that 0 2 to three. And if we come back to me, that's why it's because often they don't the sellers want room. Okay? They don't want that level to hit. Most of the time they just want to collect that premium and have time pass. Okay? So if they're having if the delta is too low for a seller, say it's 0.00 to 0.1 and they're collecting that or the IV is really cheap. It's a cheap environment, then as a seller, you're collecting this premium, but is it really going to be worth it should it move against you? can make these really small micro winds and keep stacking these wins up, but then one huge hit could come and then wipe out all those little wins. Okay? So, if we're selling, say a seller wants closer to that point 4 to.5 region for the delta. Okay. Well, now it's going to be more expensive. So sellers like this they want to collect this premium but the so the premium is going to be richer but now they could have increased assignment odds. Okay. So whereas buyers they have rights in the options world sellers they're obligated. So should the price get to that resistance and they're going to have more of a chance to get assigned at that level for sellers. Okay. And really too with that, your probabilities of of your wins are going to go down as that as the delta increases as it's higher for a seller. Okay, probabilities pretty much decline to like a coin flip at that point. and kind of your edge as a trader, you kind of can have probabilities closer to 70, 80, even 90%. That's kind of what we're looking for, that same environment as the seller as well. All right, Len, does that make sense for you? >> Some of it. >> Okay, what's not hitting? >> It's just a lot. I think it's just the sheer amount of information and my limited brain capacity. >> But I mean, I wasn't here last episode. Yeah. But, you know, I mean, certainly a lot of things that you were saying, I'm just interested in seeing what it looks like on the chain because something that I've experienced when trying to interact with options is that there's for any given um expiration date, right? There's like a bunch of different price strike prices, right? And your premium I guess is going to depend on that, right? How close. >> Correct. Yes. How far how far your strike is to at the money where pretty much that underlying is at or if we're pretty much farther out. >> So is that created is that like how is how are they priced? Are they priced by the markets? Are there market makers that make it? Could you so you so you because of the market makers you wouldn't have a situation where >> you know something is expiring two different options are expiring but the strike price that's more favorable is actually cheaper than the strike price that's less favorable just because of lack of volume or in or buyers right or sellers right it just >> so what are you asking what's your question >> so for example let's say there's a zero day option that expired at the end of today, >> okay, >> for Tesla to go to $400. Okay, let's say Tesla is at $41 right now. >> And there's another strike price that's uh that's uh Tesla to go to $42. 4002 could never be cheaper than 400, right? Because 400's already in the money. >> It depends also too if you're coming from the buyer or the from the buyer or Oh, wait. So, okay. So, Tesla's at 400. M >> on a zero day option. >> Yep. >> Okay. And you're talking about the strike. >> The strike is at there's two different options that expire on the same day. >> Tesla's at 400. One of them is at 399 and one of the strike price at 400. >> Well, we need to say is this a call or a put? >> Let's say a call. >> Okay. A call. So then >> 401 will never be cheaper than 3.99. >> 401 will be more expensive >> because it's already in the money. >> Correct. Nice. Perfect. Yes. Because as it's more in the money, it has more certainty that it's going to become profitable. >> Gotcha. All right. Makes sense. >> Makes sense. >> Okay. I'm glad we went through that. All right. As we hammer now going through Delta from the buyer and seller, let's get to the chain. >> Let's dive into the chain. >> Wait, what? All right. Sorry. Thanks, guys. Wasn't loading. All right. I'm going into the chain now. Looking at coherent. There we go. And with this, we're already looking at that kind of 185 to 195 level. Um, just to look at this though, implied volatility is at the 54 percentile. So, we're in the middle of the pack right now, but it's only going to continue to increase as they report tomorrow. So, with that too, we're also kind of getting a split of a trend on the put call. Open interest is at 1.60. So, that's kind of a bearish read saying more puts than calls. But when we're reading open interest, this is old news. This is kind of going off of Friday's close. Now, just today though, there is more volume coming in. So volume is new money and that is more calls than puts are coming in today. So from last Friday, we kind of had a bearish sentiment. But today, we're getting a more bullish sentiment. So other traders may seeing coherent on that trend line and thinks it bounced from here. it thinks and thinks it bounces from here and goes to the upside. So with that, we still don't really have kind of expensive environment. The trends are kind of fighting each other. And then when it came to the when it comes to the chart too, we were only at one kind of factor at that level. I'm really looking for price to get down to that 185 195 level. And then after that earnings sprint to land, so IV crush will occur and now these premiums will be cheaper to enter as a buyer. So that's pretty much the play for today. We're going to wait till after coherent reports that bell and once they get there, then we could revisit the chart to either put in a call or put on that trend line. >> Cool. >> Thank you so much, Lon, for being here today. >> Thank you for having me. I appreciate it and I hope you guys have a great rest of your day. We chose to pass on coherent today because they report earnings tomorrow and options their price for the print and that premium does get crushed after earnings. So, we're going to wait. But what does flip it after earnings when the prints out? Then we could re visit the chart and chain to see a better setup. Thank you guys so much for joining us this Monday. I hope you guys have a great rest of your week and thanks again for joining me today. See you later.