Short Delta

What is Short Delta? How do you get short delta in your options position?

Short Delta - Definition

Short Delta, or Negative Delta, is a characteristic of an options position which allows the position to rise in value with a drop in the value of the underlying stock.

Short Delta - Introduction

As if options greeks are not confusing enough in options trading, you can even go short on some options greeks in order to profit from more interesting ways!

Options are the most versatile trading instruments ever created and Options Strategies that are "Short Delta" are strategies that profit when the underlying stock goes down. Options delta measures the sensitivity of an option's price to changes in price of the underlying stock. As such, the higher the short or negative delta, the more sensitive an options trading position is to changes in price of the underlying stock. However, Short Delta is not limited to only downside speculation. It's true value comes in calculating the amount of options needed to hedge a position. Learn all about Options Delta.

This tutorial shall explore the instances where you get short delta or negative delta in options trading and some applications of short delta.

What Does Short Delta Mean?

Short delta in options trading is when an option or an overall options position has a delta value that is negative. The most common form of short delta position in options trading is by buying put options. Put options rise in value as the underlying stock drops in value and that is what options or options positions with overall negative or short overall delta value does. See the picture of AAPL's put options chain below. Do you see that the delta values are negative?

Put Options Are Short Delta

Options contracts or options strategies that are Short Delta are options or options strategies that profit when the underlying stock goes down. In fact, you can get short delta not only using options but also from stocks and futures as well. Shorting stocks gives you a short delta of 1 (negative 1) and being a short in a futures contract also gives you a short delta of 1. As there are more and more options trading strategies that are used in combination with stocks and futures, it is also important to be aware of the delta status of these two instruments.

Options with Short Delta

There are two situations where single options produce short deltas in options trading. When you buy put options or write call options. As you can see above, put options are designed to rise in value when a decline in the value of the underlying stock by default. However, call options are options with positive delta. This means that they rise in value when the underlying stock goes upwards. How do you get short delta with call options? By writing call options. For instance, call options with delta of 0.7 becomes delta of -0.7 when they are written.

Does that make writing call options the same as buying put options in terms of options greeks? Not exactly.

Buying put options is a short delta, long gamma position while writing call options is a short delta, short gamma position. Gamma is the rate of change of delta to changes in price of the underlying stock. This means that the short delta of a put option would get higher and higher the more the underlying stock drops, moving towards a short delta of -1 while the short delta of a call option would get smaller and smaller the more the underlying stock drops, moving towards a short delta of -0. Yes, this clearly shows the fact that writing call option has limited maximum profit in the form of the net credit gained while buying put options has unlimited maximum profit.

Options Strategies with Short Delta

Options strategies with short delta are mainly Bearish Options Strategies. Bearish options strategies are options strategies you use when you expect the underlying stock to go downwards. These options strategies are made up of several long and short options while maintaining an overall short delta position.

Here's the overall delta of a bearish options trading strategy known as the Bear Put Spread:

Short Delta Example: Bear Put Spread on AAPL Using the put options in the picture above. Buy To Open March195Put and then Sell To Open March185Put. March195Put = -0.4662 delta Short March185Put = 0.2919 delta Overall position delta = 0.2919 - 0.4662 = -0.1743

As you can see from the example above, even though a Bear Put Spread consists of options of both positive and negative delta, it is an overall short delta position which allows it to profit when the underlying stock goes downwards.

Short Delta and Hedging

Knowing the delta status of your options trading position is extremely important when hedging using options. This is particularly in the case of delta neutral hedging where the amount of positive delta and negative delta must be equal. So, how do you hedge a short delta position? You hedge a short delta position using positive delta of course.

For instance, a short stock position is a short delta position with delta of -1. In order to hedge against the directional risk of such a position, positive delta can be added onto the position either by buying call options or shorting put options. Lets look at the effects:

Hedging A Short Delta Position Example: Buying Call Options on a Short Stock Position Assuming you are short 100 shares of AAPL. You bought one contract of at the money call options with delta of 0.5 as a hedge. Overall delta position = 0.5 - 1 = -0.5 Shorting Put Options On a Short Stock Position Assuming you are short 100 shares of AAPL. You wrote one contract of at the money put options with delta of -0.5 as a hedge. Overall delta position = 0.5 - 1 = -0.5

As you can see from the examples above, the position remained as a short delta position but the overall sensitivity of the position to further drops in the underlying stock is reduced.

Further Reading: Delta Neutral Trading

Learn my proprietary system of short and neutral delta trading that produces 5% to 8% monthly income under every market conditions, even strong trending markets!