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Delta and BP Expansion Risk - Dec 4, 2018 | Market Measures
New traders often underestimate the risk of buying power expansion. Tune in to learn how to mitigate this risk.
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      Market Data provided by CME Group & powered by dxFeed Technology. Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
      Market Measures

      Delta and BP Expansion Risk

      Dec 4, 2018

      The buying power is the amount of capital required to enter a trade. Despite the fact that it’s a fixed amount at trade entry, the value can often change dramatically through the life of a trade.

      In this piece, the Research Team explores the relationship between the buying power expansion and the delta of a position by looking at short puts.

      The Study:

      • SPY
      • 16 Delta Put
      • Closest to 45 DTE
      • Recorded BP expansion ratio against delta in the course of one expiration cycle and compared:
      • Delta expanded above 80
      • Delta stayed lower than 50
      • Delta stayed lower than 20

      Results:

      Buying power is determined by several factors including:

      • underlying stock’s price
      • the out-of-the-money value
      • option’s price

      This implies that the buying power is directly related to the delta of an option position. Thus, to control the risk of extreme buying power expansion, traders should maintain tight delta ranges, limit the number of contracts traded, and adjust their strikes.

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