Options Jive

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Delta Overstatement

Options Jive

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Option sellers profit from the difference in implied volatility (expectations) and realized volatility (reality). Since implied volatility tends to overstate, how has delta performed as an estimate of an option expiring in the money at expiration?

Looking at varying delta puts and calls, we see that over the past ten years delta has understated the likelihood of calls expiring in the money at expiration and overstated that for puts. Since traders cannot forecast future price direction, they can sell strangles which are comprised of both put and calls.

Over the last ten years, delta has overstated the likelihood of strangles expiring in the money at expiration thus presenting a small edge for neutral premium sellers.

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