Beta is a metric that tells you how much a stock might move when the SPX moves 1%. Beta weighting is a tool that tells you how much your portfolio might make or lose when the SPX moves $1. Beta weighting is important because it lets you compare the risk of the different positions (measured by their deltas) in your portfolio on an “apples to apples” basis. 100 shares of IBM and 100 shares of AAPL both have deltas of 100, but they have different levels of risk. You can’t compare their deltas directly to see which has more risk than the other. Beta weighting converts the deltas in IBM and AAPL to deltas in SPX so you can see how much risk your IBM shares have in SPX terms and compare them to the risk your AAPL shares have in SPX terms.
If IBM has a beta of 1.10, that means that based on historical data, when the SPX moved up or down 1%, IBM typically moved up or down 1.1%. Beta lets you approximate how much the price of IBM might change when the price of the SPX changes. We’ve extended that concept to the delta of your positions. The delta of an option tells you how much the price of the option will change when the option’s stock changes $1.00. If an option is worth $2.00 and has a delta of .30 with the stock at $50, it will be worth $2.30 if the price of the stock moves to $51. If you bought one of those options for $2.00, your p/l would be +$30 when the stock rose to $51.
Your position delta is just the option’s delta times $100 (or whatever the multiplier is for that option series).
Beta weighting takes that concept one step further. Beta weighting converts the position delta by its underlying stock’s beta to tell you what your p/l might be if the SPX moves up or down $1.00. When you beta weight the deltas of your position, you can see which ones have more deltas (market risk) than the others. And you can add them together to get the total beta weighted deltas of your portfolio. Beta weighted, your IBM shares might have 40 SPX deltas and your AAPL shares might have 80 SPX deltas. That suggests your AAPL position has 2x the risk your IBM position does. You can also add those together to see that your portfolio has 120 SPX deltas, and could make $120 if SPX rises $1.00, or lose $120 if SPX drops $1.00.
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