Market Measures

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The Most Overstated Deltas

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.

When trading options, we consistently reference the Greeks, which quantify how option prices change with respect to certain variables like time, underlying asset price movement, and interest rates. In this piece, we explore the overstatement of price moment based on how far out of the money options are based on their delta values.

The Study:
  • SPY
  • 2005 – Present
  • Explored Price Overstatement for Varying Deltas:
    • 10, 20, 30, 40, 50.

Using the delta value of an option, we can approximate how likely an underlying is to move to or past a given price. Comparing expectations and reality we can see that participants consistently overstate the reality of downside price movements. The same holds true for upside price movements, albeit not as robustly.

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