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Market Measures

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Put and Put Spread Delta Exposure

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

A common strategy to reduce the Buying Power Requirement is to turn a naked put into a put spread. One of the trade-offs of reducing this Buying Power Requirement is a reduction in the Delta Exposure. For example, a short 20 Delta put nets 20 long Deltas while the same short put converted to a $5 wide put spread only nets 6 long Deltas. Does this reduced Delta exposure for put spreads persist through the life of the trade?

The Study:
  • SPY
  • 45 Days to Expiration
  • 2005 – 2019
  • Short 20 Delta
    • Naked Put
    • $5 Wide Put Spread
  • Compared Delta Exposure

Looking at one trade occurrence we see how naked puts with no off-setting long option are more susceptible to Delta expansion than their risk defined counterpart. Expanding this analysis to all occurrences, we see that when the trade is profitable the difference in Delta exposure between naked puts and put spreads is very narrow. However, when the trade is a loser the difference is stark, naked puts assume much greater Delta expansion risk. With their larger Delta exposure and potential expansion risk, naked positions warrant more proactive management.

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