Sugar Options Explained

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Contents

Sugar Options Explained

Sugar options are option contracts in which the underlying asset is a sugar futures contract.

The holder of a sugar option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying sugar futures at the strike price.

This right will cease to exist when the option expire after market close on expiration date.

Sugar Option Exchanges

Sugar option contracts are available for trading at NYSE Euronext (Euronext) and Tokyo Grain Exchange (TGE).

Euronext White Sugar option prices are quoted in dollars and cents per metric ton and their underlying futures are traded in lots of 50 tonnes of sugar.

Euronext Raw Sugar options are traded in contract sizes of 112000 pounds (50 long tons) and their prices are quoted in dollars and cents per pound.

TGE Raw Sugar option prices are quoted in yen per metric ton and their underlying futures are traded in lots of 50 tonnes of sugar.

Exchange & Product Name Underlying Contract Size Exercise Style Option Price Quotes
Euronext White Sugar Options 50 ton
(Full Contract Specs)
American Calls | Puts
Euronext Raw Sugar Options 112000 lb
(Full Contract Specs)
American Calls | Puts
TGE Raw Sugar Options 50 ton
(Full Contract Specs)
American N.A.

Call and Put Options

Options are divided into two classes – calls and puts. Sugar call options are purchased by traders who are bullish about sugar prices. Traders who believe that sugar prices will fall can buy sugar put options instead.

Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.

Sugar Options vs. Sugar Futures

Additional Leverage

Limit Potential Losses

As sugar options only grant the right but not the obligation to assume the underlying sugar futures position, potential losses are limited to only the premium paid to purchase the option.

Flexibility

Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.

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Time Decay

Options have a limited lifespan and are subjected to the effects of time decay. The value of a sugar option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.

Learn More About Sugar Futures & Options Trading

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Sugar, explained

Sugar is the dietary villain of our day. But the science is complicated.

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Researchers are divided on the question of in how far sugar has contributed to the obesity epidemic. SensorSpot/Shutterstock

First it was too many calories. Then it was too much fat. Now there’s a full-on war on sugar, our latest dietary enemy No. 1.

In health policy and nutrition science circles, this single nutrient is taking up a lot of oxygen these days. Sugar is being blamed for the obesity and diabetes epidemics. We’ve started to tax it in our beverages and remove it from our schools. New York Times columnists and svelte celebrities are eliminating it from their diets to retrain their palates or detox for the new year. Food companies are trying to cut back on it in a few of their products.

In his compelling book, The Case Against Sugar, journalist Gary Taubes argues that we should view the sweet stuff as toxic — in the same league as cigarettes or alcohol. Other anti-sugarists go further, suggesting we should call it an addictive drug and regulate it as such.

But that’s just one side of the debate. Other health experts will tell you that focusing on a single nutrient like sugar is outdated, that the causes of obesity are complex and multifactorial, and that overemphasizing sugar’s harms could even be dangerous for public health.

The backlash against sugar, and the science behind it, is a lot more complicated than it seems. Here are 11 facts to clear up the confusion.

1) We’re so hooked on sweetness, it’s now in three-quarters of our packaged food

Sugar is in so many of the foods we eat. It’s loaded into our granola and our juice, our BBQ sauce and salad dressing. Some three-quarters of packaged foods and drinks in the US now carry caloric or low-calorie sweeteners (or a mixture of both), a study in The Lancet found.

The sweetening of the American diet didn’t happen overnight, though. In The Case Against Sugar, Taubes takes the long view, explaining how sugar consumption crept up in the 19th and 20th centuries with the rise of the chocolate, soda, candy, and ice cream industries. A boom in the production of sugar beets and corn to make high-fructose corn syrup, both cheaper alternatives to cane sugar, lowered the cost and increased the availability of the sweet stuff. Government subsidies for crops like corn also helped make sugar more ubiquitous than, say, fruits and vegetables.

“In the 13th century, a pound of sugar would have cost the equivalent of about 360 eggs,” Taubes told Vox. “Today it’s the equivalent of two.”

The low-fat movement of the 1980s meant that more sugar was added to many packaged foods (to boost the flavor when fat content was lowered). The snack food industry exploded in popularity, becoming a leading sugar delivery mechanism. Breakfast slowly became more like dessert, as food companies added more and more sugar to cereals, yogurts, and other morning favorites to heighten their appeal.

As journalist Michael Moss elucidates in his book Salt, Sugar, Fat, the addition of sugar to our food (along with, ahem, salt and fat) was a key strategy of food companies like Kraft, Coca-Cola, and Nestlé to engineer their products for maximum “bliss” and get us hooked.

The food industry’s savvy marketing and distribution efforts, meanwhile, made their sugary products omnipresent. As Marion Nestle, author of the book Soda Politics, told Vox: “ . during World War II . Coke made a deal with the Army to provide a Coke to any soldier anywhere in the world at a nickel apiece, and they got the Army to support that. This means the Army did all the transportation and helped build bottling plants.” By the end of the war, a global infrastructure was in place to deliver Coke all over the world, “and they had a whole generation of GIs and their families totally devoted to Coke,” she added.

So where has it left us? Americans’ consumption of added sugars was 358 calories per day, or about 94 grams, in 2020, up from 235 calories per day in 1977-’78.

There’s a mountain of research on all the ways a sugar-heavy diet can harm our health. Increased risks of obesity, Type 2 diabetes, tooth decay, and heart disease are just some of the most well-established examples.

Take, for instance, a 2020 review of the literature on weight and sugar from the World Health Organization, which found that adults and children who consume less added sugar tend to weigh less, and that more sugar in the diet is associated with weight gain.

In the same review, the WHO found higher rates of tooth decay in people who got more than 10 percent of their daily calories from added sugars.

A high intake of sugar is associated with heart problems. That’s likely because sugar increases triglycerides in the blood, which may also help harden the arteries and thicken artery walls — driving up the risk of stroke, heart attack, and heart disease.

Finally, there’s good evidence that people who drink sugar-sweetened beverages are at an increased risk of Type 2 diabetes, regardless of their body fat.

One caveat here: Not everyone has the same response to sugar. There’s strong evidence that people have unique blood glucose responses to identical meals, for example. (Researchers have found the same variability in response to other nutrients, like fat.) So there is a subset of the population that does a great job breaking down sugars without bearing the deleterious health consequences. Taubes, in the anti-sugar camp, points out there’s a subset of the population that can smoke without getting lung cancer, but that doesn’t mean smoking doesn’t cause lung cancer.

3) But researchers don’t agree about whether we can blame sugar alone for the rise in obesity

The research community is somewhat divided right now on the question of how much sugar on its own has contributed to the obesity epidemic.

Some leading researchers on diet and health think it’s the major cause, and even argue that sugar is toxic and should be regulated like other substances (alcohol and tobacco) that are harmful to health. (Read Taubes’s book for a good summary of that line of thinking. Taubes builds on research by Robert Lustig at the University of California San Francisco and David Ludwig at Harvard, who’ve both blamed sugar and other refined carbs for obesity.)

But other scientists are not so quick to single out sugar. In a 2020 paper, a group of researchers from around the world pointed out that the calorie supply overall increased during the same time obesity rose. (The average American’s total caloric intake grew from 2,109 calories in 1970 to 2,568 calories in 2020, as Eliza Barclay and I explained here — though other estimates suggest some of those calories wound up in the trash, and the actual calorie increase was more like 250 calories per person, which is still enough to account for the obesity epidemic.) And a lot of things in our environments have changed over the past 50 years that may also have contributed to the rise in obesity.

No matter what you think about the cause of obesity, no credible nutrition researcher would argue against the fact that most of us could stand to eat less sugar. The latest US Dietary Guidelines recommend that added sugars make up no more than 10 percent of your daily calories. So if you eat 2,500 calories a day, you should get no more than 250 of those from sugar. That’s about a can and a half of soda or a little more than half a cup of granola.

That might not be strict enough. The American Heart Association, for example, recently updated its guidelines to suggest that children consume no more than 100 calories, or about 6 teaspoons (25 grams), of added sugars per day and avoid sweets altogether until the age of 2.

4) There are at least 60 euphemisms for added sugar

Let’s pause and clarify what we’re talking about when we talk about sugar.

Sugar comes in the form of different carbohydrate molecules — most commonly fructose, glucose, sucrose, and lactose — all composed of carbon and hydrogen atoms (hence the name carbohydrate). These molecules occur naturally in (and lend sweetness to) fruits, some vegetables, grasses (sugarcane is one!), and dairy products. Your body uses these sugars for energy.

But “added sugars” are the ones health officials worry about most. These are the sweeteners (most often called sucrose, fructose, and high-fructose corn syrup) added to foods and drinks to make them more toothsome, extend their shelf life, or give them a certain texture. They are also used by the body for energy, like the sugars from fruit, but unlike fruit, which has essential nutrients. And though fruit can be really sweet, it tends to be absorbed into the blood more slowly because of its fiber, while soda and candy are metabolized quickly, spiking blood sugar levels.

Added sugars can masquerade under many different names on food labels, a tactic the food industry uses to confuse consumers and obscure how much sugar is really in our food.

5) There’s one big reason researchers think cutting sugar from your diet is the best way to lose weight. And it’s contentious.

One prominent scientific model behind the idea that sugar contributes to obesity is the “carbohydrate-insulin hypothesis.” It suggests that a diet heavy in carbohydrates (especially refined grains and added sugars) leads to weight gain because of a specific mechanism: Carbs drive up insulin in the body, causing the body to hold on to fat and suppress calorie burn.

According to this hypothesis, to lose weight, you reduce the amount of carb calories you eat and replace them with fat calories. This is supposed to drive down insulin levels, boost calorie burn, and help fat melt away.

This method arose as an alternative to the classic approach to dieting, in which calories in general are restricted. So instead of just cutting calories, you’re supposed to change the kinds of calories in your diet to lose weight. But what’s often lost in all the boosterism around the low-carb approach is that it is still an unproven hypothesis in science.

Most tests of low-carb diets have involved either measuring what people eat over long periods of time or assigning people to different diets and then tracking their weight and health outcomes. But people can’t always stick to the diets they are assigned to for long periods. And when you measure what people are eating naturally, there’s always a chicken-and-egg problem, which is why many diet studies are marred by confounding factors and flaws. (We explained them here at Vox.)

One recent high-quality pilot test of this diet, led by National Institutes of Health obesity researcher Kevin Hall, debunked the idea that a low-carb diet leads to significantly more weight loss — results that echoed a previous study wherein Hall found that people who cut fat in their diets have equal or greater body fat loss than those who cut carbs. (Here’s Hall’s new review of the literature on the carb-insulin model of obesity.)

If you go down an alternative line of thinking — that it’s mainly the calories and not the nutrients that matter for obesity — the other key reason people think sugar may be uniquely problematic is that it’s hyper-palatable and easy to overconsume. “You add more sugar to ice cream, the ice cream tastes better, and so you overeat it,” said Richard Bazinet, a professor of nutritional sciences at the University of Toronto. “It’s the addition of sugar to foods that leads to overconsumption.” (Chocolate, ice cream, and cookies ranked among the top five foods people overconsume — part of a line of research that suggests sugary foods have addictive properties.)

Sugar is quicker to break down in the body compared with fat and protein, so it’s less satiating — which also makes it easy to overeat. That’s particularly true when we drink it in beverage form. (Researchers have found that we seem to be able to guzzle a lot of caloric beverages like soda without reducing our calories from food — though the reason for this is not fully understood.)

6) Fructose is metabolized differently than other sugars, but it’s not clear whether that matters for obesity

There’s been a lot of back and forth in recent years about whether one type of added sugar (in particular, fructose and high-fructose corn syrup) is worse for health than any other type. The bottom line is that for most people, sugars of all kind should be eaten sparingly. But fructose does have some unique and potentially worrisome properties.

We metabolize fructose differently than glucose, which can be readily used as is. The body has to convert fructose into glucose or fat in the liver, intestine, and kidney. This two-step process has been associated — in people with fructose-heavy diets — with adverse health effects such as fatty liver disease, increased visceral fat, and kidney issues.

There are also some unknowns about how fructose specifically impacts health over the long term, particularly when it’s a big part of the diet (think soda junkies). At least on the obesity question, one recent systematic review of the evidence on fructose and weight gain found this sugar does not seem to be a worse offender than sugar.

For now, here’s some lucid advice from one of the leading fructose researchers, Luc Tappy of the University of Lausanne, that should put this all into perspective:

Given the substantial consumption of fructose in our diet, mainly from sweetened beverages, sweet snacks, and cereal products with added sugar, and the fact that fructose is an entirely dispensable nutrient, it appears sound to limit consumption of sugar as part of any weight loss program and in individuals at high risk of developing metabolic diseases. There is no evidence, however, that fructose is the sole, or even the main factor in the development of these diseases, nor that it is deleterious to everybody, and public health initiatives should therefore broadly focus on the promotion of healthy lifestyles generally, with restriction of both sugar and saturated fat intakes, and consumption of whole grains, fresh fruits and vegetables rather than focusing exclusively on reduction of sugar intake.

7) The sugar industry has shaped science

The sugar industry has a long history of shaping nutrition policy in the United States, and has lately been working hard to mask the potential risks of consuming too much sugar. (See the added sugar label section below.)

Recent research, published in JAMA Internal Medicine, shows that big sugar may have done more than just advocate for favorable policies. Going back more than 50 years, the industry has been dictating what questions get asked about sugar, particularly questions around sugar’s role in promoting heart disease.

The paper focuses on a debate that first popped up in the 1950s, when the rate of heart disease started to shoot up in the United States. Scientists began searching for answers, and zeroed in on dietary saturated fat as the leading contributor. (The energy we get from food comes in three kinds of nutrients: fats, carbohydrates, and protein.)

This may not have been an accident. Going through a trove of archival documents, the authors of the JAMA paper show how a sugar trade association helped boost the hypothesis that eating too much saturated fat was the major cause of the nation’s heart problems while meanwhile sowing doubt about the evidence showing that sugar could be a culprit too.

“This 50-year-old incident may seem like ancient history,” writes Marion Nestle in an accompanying editorial, “but it is quite relevant, not least because it answers some questions germane to our current era. Is it really true that food companies deliberately set out to manipulate research in their favor? Yes, it is, and the practice continues.”

The Sugar Association — the trade group that the Sugar Research Foundation became — continues to push back on the sugar-heart link. Most recently, the association called the American Heart Association’s recommendation that kids eat no more than 6 teaspoons of sugar a day “baffling,” arguing that it was not based on science and that added sugars can have a healthy place in children’s diets.

8) A big backlash against sugar is underway

We’re now seeing real momentum to limit sugar in the American diet, from policies to rid sugary snack foods from schools to soda taxes, added sugar labels, and the industry effort to make its products less cloying.

In the past year alone, the Food and Drug Administration introduced new labeling requirements for added sugars, and five cities (Philadelphia, San Francisco, Oakland and Albany, California, and Boulder, Colorado) passed soda taxes (following Berkeley, which passed one in 2020). These efforts were spurred by unprecedented spending by public health–conscious philanthropists on the pro-tax lobbing effort.

A number of countries, like the United Kingdom, Mexico, and Denmark, already have similar taxation schemes in place. They each work a little differently, but they share a common goal: to raise the price of sugary beverages to drive down the amount people drink and, in turn, reduce amount of sugar in the diet, and maybe even nudge down the rate of obesity and improve awareness of the health harms sugar carries.

But it’s important to note that sugary drinks are only one source of added dietary sugar, and taxes on them haven’t yet been linked to marked health improvements, said Shu Wen Ng, an associate research professor in nutrition at the University of North Carolina. “It will be a while before we expect to see health effects — like weight change, metabolic changes — as these changes require persistent changes over time to occur.”

Ng pointed out that the obesity epidemic crept up slowly and insidiously. Reversing the trend will take time. “It will also take more than just a sugar-sweetened beverage tax,” she said.

Even if soda taxes don’t immediately change health, they do have other benefits.

First, they can raise awareness about the health harms of drinking what is essentially nutrient-bankrupt liquid sugar. “Taxes generate a vast amount of media discussion of the effects of sugary drinks on health,” Nestle pointed out.

Taxes help shift social norms, as they did with smoking. And given that soda consumption is already on the decline, taxes could be an additional push in getting us to drink less.

“While a sugar-sweetened beverage tax will not be a silver bullet, if it results in even more moderate changes in obesity, that would be very welcomed by public health advocates,” said Brian Elbel, an associate professor in popular health and health policy at the NYU School of Medicine. He added that the tax may be just one of the many policy tools in the toolbox.

As Elbel said, “We have to keep looking for policies that can have even small but cumulative impacts.” Given that there are many things wrong with the American diet beyond just our problematic sugar consumption, that sounds like a sound approach.

9) You’ll soon be able to tell how much sugar is hidden in your food

By 2020, Americans will be better able to gauge how much sugar has been added to food.

Until recently, food companies weren’t required to disclose added sugar the way they were about the total carbohydrates, fats, and sodium in their products.

Finally, last May the FDA announced a final ruling on a long-anticipated overhaul of calorie labels on packaged foods. The new Nutrition Facts labels will appear on millions of food packages by 2020, disclosing how much sugar has been added.

Most food companies will be required use this new nutrition label in 2020. FDA

The reason it’s taken so long to give Americans this information: fierce lobbying from the food industry since the new label design was first proposed in 2020 after a years-long push by the Obama administration. “The Sugar Association and Grocery Manufacturers Association have opposed the added sugars line,” said Michael Jacobson, the president of the Center for Science in the Public Interest, which has advocated for added sugar reporting on labels since 1999.

For now, however, the sugar lobby has lost, he added. “Having the added sugars will shock people into realizing how much sugar they’re eating.” It’s also expected to encourage companies to reformulate products to make them healthier.

10) Artificial sweeteners may trigger the body’s responses to real sugar

Artificial sweeteners deliver the pleasing sweetness of sugar without the calories. Scientists are increasingly wondering whether artificial sweeteners — for instance, aspartame in diet soda — are as benign as they seem. In the absence of a firm answer, there are several hypotheses floating around.

There’s research that suggests fake sweeteners affect the brain in weird ways. Diet drinks seem to affect sugar cravings, for one thing. Experimental studies in humans have found that the taste of sweetness, whether real or artificial, can boost appetite and cause people to eat more. Here’s how Stanford’s Christopher Gardner put it: “If you have a Diet Coke in the afternoon, and then it is dinnertime and you remember that you had a Diet Coke, you might reward yourself with a bowl of ice cream.” Capturing this compensation effect is really tough, however.

Other small studies demonstrated that when people are given sucralose, they experience a rush of insulin that doesn’t lead to a decrease in blood glucose levels — as if the artificial sweetener is preventing the insulin from doing its job. This is the hallmark of insulin resistance and a harbinger of diabetes.

Scientists have also wondered whether these sweeteners affect our gut flora — the bacteria in our digestive tracts that help with metabolism (and many other critical bodily functions). Emerging evidence — albeit from studies only done on rodents — suggests the chemicals in artificial sweeteners cause disturbances in the gut flora associated with metabolic disorders like diabetes and obesity.

In one recent study in mice published in the journal Applied Physiology, Nutrition, and Metabolism, researchers at Massachusetts General Hospital found that aspartame blocks an enzyme previously shown to prevent obesity, diabetes, and metabolic syndrome.

The main idea here is that fake sugars may trigger our body’s responses to real sugar. When we taste something sugary, our body is conditioned to release hormones like insulin, so that when the sugar and calories hit our gut, we’re prepared to metabolize them. When you introduce artificial sweeteners, the body gets ready for sugar, but the sugar then doesn’t arrive.

When it comes to weight loss — the aim of many people drinking artificially sweetened diet sodas — the shorter-term randomized trials tend to show that substituting sugary drinks with low-calorie alternatives leads to modest weight losses. Longer-term observational studies find people who drink diet soda tend to be heavier than those who don’t. (Of course, observational research can only demonstrate correlation and not causation.)

That’s not to say that loading up on real sugar and sugary drinks is a good idea. Again, the evidence about sugar’s harms is very strong. The evidence about the health effects of sugar substitutes is just less clear.

11) To cut back, make sure your breakfast isn’t dessert and stop drinking sugary drinks

There are three very simple ways to immediately cut your sugar intake.

First: Stop drinking soda, sweetened coffees and other sugary drinks. They are easy to overconsume, they’re filled with calories, and they do nothing to improve your health and probably harm it.

Second, make sure your breakfast isn’t dessert. Look for cereals with lots of fiber to fill you up and little or no added sugar, yogurts that don’t have names like Key lime pie and cheesecake, or try other foods in the morning that aren’t sweet. Eggs and vegetables are a dependable, nutrient-rich option. They’re also satiating, thanks to the protein and fat.

There are some fruits that have more sugar than others (like grapes and mangos), though if you really want to curb your added sugar intake, it’s probably not fruit that’s the problem. Instead, cut back on dessert and sweet snacks. Pie, candy, cake, and cookies are still some of the leading sources of added sugar in the American diet. So try saying no to them more often, and your added sugar intake will go down, down, down.

Options Trading Strategies: Understanding Position Delta

The article Options Trading Strategies: Understanding Position Delta discusses risk measures such as delta, gamma, theta, and vega, which are summarized in figure 1 below. This article takes a closer look at delta as it relates to actual and combined positions – known as position delta – which is a very important concept for option sellers. Below is a review of the risk measure delta, and an explanation of position delta, including an example of what it means to be position-delta neutral.

Simple Delta

Let’s review some basic concepts before jumping right into position delta. Delta is one of four major risk measures used by option traders. Delta measures the degree to which an option is exposed to shifts in the price of the underlying asset (i.e. stock) or commodity (i.e. futures contract). Values range from 1.0 to –1.0 (or 100 to –100, depending on the convention employed). For example, if you buy a call or a put option that is just out of the money (i.e. the strike price of the option is above the price of the underlying if the option is a call, and below the price of the underlying if the option is a put), then the option will always have a delta value that is somewhere between 1.0 and –1.0. Generally speaking, an at-the-money option usually has a delta at approximately 0.5 or -0.5.

Vega Theta Delta Gamma
Measures the impact of a change in volatility. Measures the impact of a change in time remaining. Measures the impact of a change in the price of underlying. Measures the rate of change of delta.

Figure 1: The four dimensions of risk – AKA, the “Greeks.”

Figure 2 contains some hypothetical values for S&P 500 call options that are at, out and in the money (in all these cases, we will be using long options). Call delta values range from 0 to 1.0, while put delta values range from 0 to –1.0. As you can see, the at-the-money call option (strike price at 900) in figure 2 has a 0.5 delta, while the out-of-the-money (strike price at 950) call option has a 0.25 delta, and the in-the-money (strike at 850) has a delta value of 0.75.

[Delta is just one of the major risk measures skilled options traders analyze and make use of in their trading strategies. You can learn the other forms of risk and take strides to become a successful options trader by taking Investopedia Academy’s Options for Beginners Course. Learn the same knowledge successful options traders use when deciding puts, calls, and other option trading essentials.]

Keep in mind, these call delta values are all positive because we are dealing with long call options, a point to which we will return later. If these were puts, the same values would have a negative sign attached to them. This reflects the fact that put options increase in value when the underlying asset price falls. (An inverse relationship is indicated by the negative delta sign.) You will see below, when we look at short option positions and the concept of position delta, that the story gets a bit more complicated.

Strikes Delta
950 0.25
900 0.5
850 0.75

Note: We are assuming that the underlying S&P 500 is trading at 900.

Figure 2: Hypothetical S&P 500 long call options.

At this point, you might be wondering what these delta values are telling you. Let’s use the following example to help illustrate the concept of simple delta and the meaning of these values. If an S&P 500 call option has a delta of 0.5 (for a near or at-the-money option), a one-point move (which is worth $250) of the underlying futures contract would produce a 0.5 (or 50%) change (worth $125) in the price of the call option. A delta value of 0.5, therefore, tells you that for every $250 change in the value of the underlying futures, the option changes in value by about $125. If you were long this call option and the S&P 500 futures move up by one point, your call option would gain approximately $125 in value, assuming no other variables change in the short run. We say “approximately” because as the underlying moves, delta will change as well.

Be aware that as the option gets further in the money, delta approaches 1.00 on a call and –1.00 on a put. At these extremes, there is a near or actual one-for-one relationship between changes in the price of the underlying and subsequent changes in the option price. In effect, at delta values of –1.00 and 1.00, the option mirrors the underlying in terms of price changes.

Also, keep in mind that this simple example assumes no change in other variables like the following:

  1. Delta tends to increase as you get closer to expiration for near or at-the-money options.
  2. Delta is not a constant, a concept related to gamma (another risk measurement), which is a measure of the rate of change of delta given a move by the underlying.
  3. Delta is subject to change given changes in implied volatility.

Long Vs. Short Options and Delta

As a transition into looking at position delta, let’s first look at how short and long positions change the picture somewhat. First, the negative and positive signs for values of delta mentioned above do not tell the full story. As indicated in figure 3 below, if you are long a call or a put (that is, you purchased them to open these positions), then the put will be delta negative and the call delta positive; however, our actual position will determine the delta of the option as it appears in our portfolio. Note how the signs are reversed for short put and short call.

Long Call Short Call Long Put Short Put
Delta Positive Delta Negative Delta Negative Delta Positive

Figure 3: Delta signs for long and short options.

The delta sign in your portfolio for this position will be positive, not negative. This is because the value of the position will increase if the underlying increases. Likewise, if you are short a call position, you will see that the sign is reversed. The short call now acquires a negative delta, which means that if the underlying rises, the short call position will lose value. This concept leads us into position delta. (Many of the intricacies involved in trading options is minimized or eliminated when trading synthetic options.)

Position Delta

Position delta can be understood by reference to the idea of a hedge ratio. Essentially, delta is a hedge ratio because it tells us how many options contracts are needed to hedge a long or short position in the underlying.

For example, if an at-the-money call option has a delta value of approximately 0.5 – which means that there is a 50% chance the option will end in the money and a 50% chance it will end out of the money – then this delta tells us that it would take two at-the-money call options to hedge one short contract of the underlying. In other words, you need two long call options to hedge one short futures contract. (Two long call options x delta of 0.5 = position delta of 1.0, which equals one short futures position). This means that a one-point rise in the S&P 500 futures (a loss of $250), which you are short, will be offset by a one-point (2 x $125 = $250) gain in the value of the two long call options. In this example, we would say that we are position-delta neutral.

By changing the ratio of calls to a number of positions in the underlying, we can turn this position delta either positive or negative. For example, if we are bullish, we might add another long call, so we are now delta positive because our overall strategy is set to gain if the futures rise. We would have three long calls with a delta of 0.5 each, which means we have a net long position delta by 0.5. On the other hand, if we are bearish, we could reduce our long calls to just one, which we would now make us net short position delta. This means that we are net short the futures by -0.5. (Once you’re comfortable with these aforementioned concepts, you can take advantage of advanced strategies, such as position-delta neutral trading.)

The Bottom Line

To interpret position delta values, you must first understand the concept of the simple delta risk factor and its relation to long and short positions. With these fundamentals in place, you can begin to use position delta to measure how net-long or net-short the underlying you are when taking into account your entire portfolio of options (and futures). Remember, there is a risk of loss in trading options and futures, so only trade with risk capital.

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