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Market Measures

Directional Efficiency

Jan 21, 2016

When looking to make a directional trade, there are numerous strategies we can use. How do we decide which one to use? We begin by considering the delta of the position (directional risk/exposure), the margin required and/or the buying power reduction, the loss potential and the profit potential. Some strategies are more efficient than others for one criteria while the others may be more efficient in the rest. As an example, selling a 10 delta call may have a high margin requirement and a relatively low directional bias.

A table comparing at-the-money (ATM) options with lower delta options using SPY (S&P 500 ETF) was displayed. The table compared the strategy, delta, margin required and efficiency (delta / margin requirement) on a short ATM call versus a short 16 delta call.

A table comparing a naked option position to spreads was displayed. The table compared the strategy, delta, margin required and efficiency (delta / margin requirement) on a short ATM call versus a short $5-wide ATM call spread, long $5-wide ATM put spread and a short stock position. The table showed that spreads tend to be more delta efficient in terms of capital usage and directional exposure.

A table comparing the profit potential of several SPY February option strategies based on a 2 standard deviation strangle (SD) movements in the next 30 days was displayed. The table included the strategy, delta, profit potential and loss potential. The strategies included a short ATM call, a short 5-wide ATM call spread, a long $5-wide put spread and a short stock position.

A final table of the return on capital (ROC) of the SPY February strategies was displayed. The table showed that the ATM spreads were most attractive in terms of buying power (BPR) usage and ROC.

Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the valuable takeaways and a better understanding of which strategies to use when making directional trades.

This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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