Entering my sophomore year of high school, I decided to relinquish three weeks of summer vacation to take a course in "International Markets and Finance" at Brown. Despite doing what any fourteen-year-old would cringe at, I actually had a lot of fun and learned from my intelligent peers and professor. It was a great introduction into the world of finance and definitely gave me a new perspective at the trading world.  

During our coursework, we were assigned a paper trading project in order to make some virtual dough. After competing with other teams in our class, we were going to be evaluated on performance and strategy by our professor. 

Our class duration of three weeks was a tiny time frame to measure any kind of performance or skills, because success inevitably laid in selecting stocks and hoping it rallied. What was worse,  we couldn't short stocks or trade options, futures, or any derivatives. Given these shortcoming, I dipped into my bag of tricks and tips that I learnt from my trading gurus at TastyTrade and picked 'beta-weighting delta'.

So what exactly is 'beta-weighting delta'? 

Beta-weighting delta on a portfolio is  one number that can tell us as to how much our portfolio can move up if the index moved up 1 point -- or much our portfolio would move down if the index lost 1 point. While this didn't necessarily help in picking lucky stocks, it did help us watch the impact any of our picks made on our portfolio. While our team didn't win the stock-picking competition, our unique approach to portfolio management won us some accolades from my professor.

In a past post,  I previously discussed the important Greek metric: delta. Deltas of an option are the measure of how much the option price would move for a $1 move in the price of stock. While a bit different, the concept of the 'beta weighted delta' of a portfolio remains the same: it answers the question as to how much your portfolio would gain (or lose) for a $1 gain (or loss) in the index that you are beta-weighting against.

So what is beta? Beta is a measure of volatility for a specific stock. This is computed by your trading platform based on historic relations with the index. Different stocks have different betas.  Listed below are a few betas:

As you can see, Amazon's (AMZN) beta is 1.48 while that of Facebook (FB) is 0.71. The benchmark index SPY is 1.
Beta of the stock helps us infer the volatility of the stock compared to the index. So Amazon's at 1.48 means it is about 48% more volatile than SPY and if the index rallies up one point, Amazon could rally up 48 points. 

Using beta, we can beta weight all of our stocks against the index which in essence would compare a diverse group of stocks into some sort of equivalence using the index.  The formula and calculation of the beta weighted delta is as follows:​

Stock: UAL- United Airlines (Market Price: $53.50)

Volatility @ Sell: 49.83%​
Volatility @ Buy: 42.00%
Volatility Contraction or "Crush": 7.83%

Expected Move: Midpoint of Bid-Ask Spread of Selling ATM Call: $.93 Midpoint of Bid-Ask Spread of Selling ATM Put: $1.40 Sum: $.93+$1.40= $2.33= Expected Move of stock's price

1. Sold call @ ATM Strike of $53.50 for premium of $.93 (To break even, the stock must not cross $53.50 + $.93. To profit, the stock must be below the break even price) 

2. Sold put @ ATM Strike of $53.50 for premium of $1.40 (To break even, the stock must not go below $53.50-$1.40. To profit, the stock must be above the break even price)
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3. Combined Both transactions were sold at ATM (at-the-money, or equal to current market price) strike prices. The premiums sold were the midpoints of the respective option's bid-ask spread. In order to profit, with the combined transaction, the stock's price must be above below the #1's break even price and above #2's break even price. This means I must be within +$.93 or -$1.40 of the ATM strike/current price. The total range of movement allotted for me to profit is $2.33.

As stated above, and not coincidentally, the expected move of a stock is determined by the sum of the midpoints between the bid-ask spread (mid-price fills)  for selling ATM calls and put, or $2.33.  The sum of the premiums (the midpoints) is the expected move and  the range that I want to be in in order to profit!