Ever wondered why traders aim to lose less, more frequently in options trading, and how the choice between 30 Delta vs 10 Delta strategies factors into this? One common dilemma traders face is choosing between 15 Delta and 30 Delta credit spreads. These two strategies have their own advantages and disadvantages, and understanding the math behind them can help you make more educated decisions.

Understanding Delta and Probability

Delta is a metric that helps traders gauge how far an option is from the stock’s current price. A 15 Delta credit spread means you are trading further away from the stock price, while a 30 Delta credit spread is closer to the stock price. Here’s how Delta relates to your probability of winning:

• In a 15 Delta credit spread, your win rate is approximately 85%. This means you win more often but make less profit per trade.
• In a 30 Delta credit spread, your win rate drops to around 70%. You win less frequently but potentially make more profit when you do.

Calculating Average Credit and Expected Return

To calculate the expected return of these strategies, consider the average credit you can collect. As a rough estimate, a 15 Delta credit spread might yield around 15 cents, while a 30 Delta credit spread could yield around 30 cents.

Now, let’s determine the long-term expected return. This involves multiplying the win rate by the amount you win when you win, subtracted by the loss rate multiplied by the amount you lose when you lose. For example:

• With a 15 Delta credit spread, you might win 85 times (85% win rate) and lose 15 times, losing 2% each time. This results in an expected return of $825 over 100 trades (assuming a one-dollar-wide spread).

Adding a Stop Loss Rule

Trading solely based on Delta and without a stop-loss rule might not be a sustainable strategy. To mitigate potential losses, consider implementing a stop-loss rule. For instance, you could exit a trade when your short strike price is broken.

With this stop loss rule, your risk is limited. For a one-dollar-wide spread, you might risk only $40 with a 15 Delta credit spread and $20 with a 30 Delta credit spread. This rule allows you to manage your losses effectively.

Trading with the Trend

To further enhance your trading strategy, consider trading with the trend. A simple way to do this is by adding a 50-day Simple Moving Average (SMA) to your chart. When the stock price is above the SMA, focus on put credit spreads; when it’s below, consider call credit spreads.

By aligning your trades with the trend, you can significantly improve your win rate. For example, a 15 Delta credit spread can become a 10 Delta credit spread with an 85% win rate, while a 30 Delta credit spread can yield a 71% win rate.

Comparing Different Approaches and Expected Returns

Now, let’s compare the different approaches and their expected returns:

1. Trading purely based on Delta:
   • 15 Delta credit spread with an 85% win rate results in an expected return of $825.
   • 30 Delta credit spread with a 70% win rate results in an expected return of $300.
2. Trading with the trend:
   • 10 Delta credit spread with an 85% win rate results in an expected return of $250.
   • 30 Delta credit spread with a 71% win rate results in an expected return of $1,500.

Conclusion

In conclusion, understanding the math behind your trading strategy is crucial for long-term success. While trading purely based on Delta can yield profits, incorporating a stop loss rule and aligning your trades with the trend can significantly enhance your expected returns.

Remember that trading carries inherent risks, and it’s essential to continuously educate yourself and practice responsible risk management. If you’re interested in implementing these strategies, consider seeking out additional resources and courses to further hone your skills and improve your trading edge.

Would you like to access the entire course for free and take your trading skills to the next level? Here’s the Ultimate Credit Spreads Trading System Course for FREE! Don’t miss this golden opportunity to level up your trading expertise.

Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer