Research Specials LIVE

Put and Put Spread Delta Exposure

Research Specials LIVE

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One way to reduce the buying power requirement is to turn a naked put into a put spread. One trade off of reducing this buying power requirement is a reduction in the delta exposure. A short 20 Delta put nets 20 long deltas while 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?

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. Zooming out to all occurrences, 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 naked puts assume much greater delta expansion risk. With their larger delta exposure and potential expansion risk, naked positions warrant more proactive management while spreads can be put on and then left alone until expiration if we so choose.

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