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Option leverage calculation


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Option leverage calculation

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  #11 (permalink)
 SMCJB 
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@Bookworm. While I do understand your point - and would obviously cede that most would pay more focus to gamma than leverage (hint to @Prophet85), I would have to argue that technically you are incorrect, at least in this case where the use of the word 'leverage' has been specifically defined.


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  #12 (permalink)
 Bookworm 
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The change in Delta with underlying price movement (Gamma) is orders of magnitude more important than the change of Delta over time which, if the underlying doesn't move, works against the option. It is Gamma that makes OTM options into big money makers by multiplying the Delta (and value) which is leverage to me.

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  #13 (permalink)
Prophet85
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Thank you all for taking your time to answer my questions!

The reason I was asking for leverage was for position sizing purposes which I have a hard time figuring out with options. However maybe my question wasn't asked properly so let me try to ask the question in a better way.

When trading stocks one way to position size is to equally divide your capital evenly. For example if you have $100 000 and want to buy 4 different stocks then one way to position size would be to just simply buy $25000 worth of stocks for each of the 4 stocks. Now let's assume I want to buy 4 out of the money call options (all with different underlying stocks) all with strike price of around 5% above each underlying stocks' current closing price. How would I positions size properly so the underlying stocks for the call options as closely as possible match each other?

Is there a good method or calculation that I can use to achieve this? I assume I have to use some of the greeks to be able to do this properly but I am not quite sure how...

Any input is appreciated!

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  #14 (permalink)
 SMCJB 
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Leverage and positioning sizing are two very different things.

First question is would you really want to buy $25k of each of the four stocks. If the 4 stocks were Tesla (TSLA), Advance Micro Devices (AMD), Walmart (WMT) and Colgate-Palmolive (CL) would you want equal weightings of each? One of those four is explosive, one fairly volatile and two rather mundane in comparison. Maybe you want something more volatility balanced like $5k worth of TSLA, $10K of AMD, $40k of WMT and $45k of CL?

In terms of the option question, it would depend what you wanted size equally. Obvious things to size would be delta but that would run into the same problem as above. So maybe you equally weight volatility adjusted delta's. You could also size the premiums equally. The fact that TSLA is so much more volatile the WMT would be reflected in the option price and would probably yield similar results (as long as you are looking at similar options).

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