In a previous study, we compared the performance of one ATM short put and 100 shares of long SPY over a 12-year period (See previous Market Measure "The Power of the Put"). The results showed that the short ATM put had a nearly identical performance to long stock.
This led us to ask: How can something with 50 long deltas (short ATM put) perform identically to a position with 100 long deltas (long stock)? The results relate to where option positions and stock positions make money.
Stocks derive the majority of their performance from directional movements and dividends. Short options, on the other hand, derive performance from directional movement, the passage of time, and changes in volatility.
Thus, even though the option has fewer deltas than long stock, option sellers profit from the passage of time and overstatement in implied volatility. These additional sources of profit in the option position are what fill the gap from fewer deltas.