Options involve risk and are not suitable for all investors. [+] Show details and the options disclosure document.
Options involve risk and are not suitable for all investors. Certain requirements must be met to trade options. Before engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the risks involved in investing with options. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options (PDF)" before considering any option transaction. You may also call the Investment Center at 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge.
The maximum loss, gain and breakeven of any options strategy only remains as defined so long as the strategy contains all original positions. Trading, rolling, assignment, or exercise of any portion of the strategy will result in a new maximum loss, gain and breakeven calculation, which will be materially different from the calculation when the strategy remains intact with all of the contemplated legs or positions. This is applicable to all options strategies inclusive of long options, short options and spreads. To learn more about Merrill's uncovered option handling practices, view
Naked Option Stress Analysis (NOSA) (PDF).
Early assignment risk is always present for option writers (specific to American-style options only). Early assignment risk may be amplified in the event a call writer is short an option during the period the underlying security has an ex-dividend date. This is referred to as dividend risk.
Long options are exercised and short options are assigned. Note that American-style options can be assigned/exercised at any time through the day of expiration without prior notice. Options can be assigned/exercised after market close on expiration day. View specific
Merrill Option Exercise & Assignment Practices (PDF).
Supporting documentation for any claims, comparison, recommendations, statistics, or other technical data, will be supplied upon request.
What is Delta?
Delta is the theoretical estimate of how much an option's value may change given a $1 move UP or DOWN in the underlying security. The Delta values range from -1 to +1, with 0 representing an option where the premium barely moves relative to price changes in the underlying stock.
For illustrative purposes only.
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Purchased equities.
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Buying a call option contract to establish a new position.
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Selling a put option contract to establish a new position.
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An investor is in a short position when the investor sells a stock that he or she does not own.
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Selling a call option contract to establish a new position.
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Buying a put option contract to establish a new position.
How is Delta used?
Assess Directional Risk
Bullish strategies have a positive Delta and bearish strategies have a negative Delta. Stocks and each individual leg of an option strategy have their own Delta. The Delta of the contracts and securities can be combined to assess the directional risk of the strategy as a whole. Meaning — the net Deltas will reveal if a strategy or a portfolio is bullish or bearish.
For Example:
Long 100 XYZ equals +1 Delta (Long Stock, Bullish)
Short 1 XYZ call at -.30 Delta (Short Call, Bearish)
Net Delta = +.70 Delta
From a Delta perspective, this strategy is bullish, as demonstrated by a positive net Delta, and would benefit from upward movement of the underlying though to a lesser degree than the long stock position alone.
Assess Traction (Stock Sensitivity)
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A call option is in the money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.
For illustrative purposes only.
Assess Probability of In-the-Money at Expiration
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The amount by which an option is in-the-money.
An increasing Delta is an indication that the option is becoming more sensitive to the underlying security and ultimately the premium is comprised of mostly
intrinsic value Select to open or close help pop-upThe amount by which an option is in-the-money.. For this reason, Delta can be used to assess the market-assigned probability of the option being in-the-money at expiration. Essentially, a Delta closer to +1 or -1 is an indication of greater intrinsic value which can be translated into a higher probability of being in-the-money at expiration — potentially because it already is in-the-money.
For Example:
In-the-money XYZ Call @ .60 Delta = 60% probability of being in-the-money at expiration
At-the-money XYZ Call @ .50 Delta = 50% probability of being in-the-money at expiration
Out-of-the-money XYZ Call @ .30 Delta = 30% probability of being in-the-money at expiration
What are other factors to consider?
Delta is not a constant value and changes as the stock price changes. This change in Delta is measured by another Greek, known as Gamma. Since Delta changes as the stock moves, it is important to remember that Delta will not accurately predict the exact change in the option's premium, especially for larger changes in the stock's price.