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Could somebody explain this statement: “The EZPW calls are a 19 delta, so the trade is the equivalent of 28,500 shares of stock.” I only occasionally trade options, so am still learning. My first take was that 1500 option contracts controls 150,000 shares of stock. How does a high delta modify that? If there’s a technical reference that explains it, I’d be keen to read it.
From https://www.interactivebrokers.com/campus/trading-lessons/introduction-to-options-the-greeks/ Delta represents the theoretical change in an option’s price for a $1 change in the price of the underlying asset. For a call option, Delta will range from 0 to 1. As the price of the underlying asset increases beyond the strike price and gets further in the money, the Delta will increase and approach 1, meaning that there is a greater change to the price of the option relative to the change in price of the underlying asset. An “at the money” option generally has a Delta of approximately 0.5. Alternatively, Delta can be thought of as the probability than an option will finish “in the money.” So think of it this way: if the price of EZPW goes up $1.00, each of your 1500 calls will increase in value by $19. You’ll be ahead 1500 * 19 = 28,500 which is the same as if you owned 28,500 shares.
I’m sorry. The explanation makes no sense. The buyer controls 1,500 X 100 =150,000 shares. If the stock goes up $1.00 and is a 19 delta, he is profiling by $28,500 on his investment of $51,000. Please keep in mind that this is on day one of the investment and at its current IV. At the expiry of the option when it will be worth zero if the price is $1 higher. The strike price is still $17.50.
How do you know the buyer of the calls isn’t short X amount of shares and is using the calls as a stop?
If the stock increases by $1, the delta will also increase as the stock rises. Delta changes with stock price.
Still no credible response to the following question How do you know the buyer of the calls isn’t using them as a stop/hedge vs a short position?