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How to sum up deltas to get the same benefits as futures

How to sum up deltas to get the same benefits as futures

Every trader with a small capital aspires to trade in futures. We all know that for every one point move in the underlying futures moves by one point. For example, if the nifty spot moves from 19800 to 850 Nifty futures trading at 19850 will rise to 19900. So, we observe the same point of movement. Futures doesn't have a delta value, but if we had to assign, it would be one.

But to trade in futures, we need a huge margin. Nifty futures are now trading around 19800 so it would require approximately Rs 1,25,000 as capital. How about getting the same benefit by trading in options. We have seen delta acceleration. Now do you know that deltas can be summed up.

It is summed up for various reasons in hedging strategies of options. Assuming Nifty futures is at 19806 and Nifty spot is at 19745. Nifty ATM would be 19750 strike price. Delta for ATM is 0.5. Now we want to avail one point benefit by trading in options. This is very simple.

Assume we bought a Nifty 19750 CE which is trading at 138.

So, we will buy two lots and sum up the delta 0.5 plus 0.5 which gives us one. Required capital is Rs 6900*2 which is Rs 13800. If our view is bullish and Nifty rises to 17800, we get the same 50- point move by summing up the deltas. Sounds interesting right. That too with a capital of Rs 13800. Isn’t it amazing.

Let us consider another example

Inferences from the above table

• The positive sign next to 1 (in the Position Delta column) indicates ‘long’ position.

• The combined positions have a positive delta i.e., +1.25. This means both the underlying and the combined position moves in the same direction.

• For every 1-point change in Nifty, the combined position changes by 1.25 points

• If Nifty moves by 50 points, the combined position is expected to move by 50*1.25 = 62.5 points

So, to conclude when you would want to substitute the options contract instead of futures (mainly from the margins perspective) be completely aware of its implications as options are influenced by Greeks and delta is only a part of Greeks.

(The author is a homemaker, who dabbles in stock market investments in free time)

Sneha Latha
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