Option Trading Subjects:
Percent to Double
"Percent to Double" is a concept some option traders use to sort or select long option purchase candidates. It is the answer to the question "By what percentage does this stock need to move, in order for the long option to double in value?"
Ideally, the option buyer using such a strategy would like to double his money on the smallest possible movement in the stock, and he would like to do it sooner rather than later. Both of those requirements favor using OTM options. However, OTM options are the LEAST likely to be ITM at the expiration date, so following a "percent to double" strategy is not a good strategy if you plan to hold the option until expiration. It is a strategy where you are hoping for a decent move in your favor, as soon as possible . The less confidence you have in a quick move, the more you should favor using ATM or even ITM options.
Many option data services, quote services, and online brokers can show the percent to double figure for a particular option, or you may be able to call your broker and get it from them.
The percent to double figure is normally calculated as if the stock moved by that percentage on the day of entry. However, doing so will always show that the smallest percent to double comes from buying the furthest OTM long options. But what if the stock does not move today, but moves tomorrow or next week? For this reason, many followers of percent to double style trading try to use options that show a percent to double of about 6 or 7%. This represents a tradeoff between a reasonably small stock movement needed, and enough time for the stock movement to take place.
As a rule of thumb, you will find that a 6-7% percent to double is usually found on long calls that are ATM or slightly OTM, and expire within the next month.
Time to expiration and Implied Volatility both affect percent to double. For the lowest percent to double, you want the least time to expiration that is still within your estimate of when the stock will move, and a lower implied volatility when you enter the position. The implied volatility rising after you enter the position is helpful.
You can use the percent to double concept when trading either long puts or calls, although it is most frequently associated with long calls.
The table below shows the theoretical percent to double on long calls, with a stock currently at $47.50, 30 days to expiration, and 33% IV. It demonstrates that OTM options have the lowest percent to double on the entry date, as well as the highest percent to double if they are held to expiration. If you expect a stock to move in your favor, but aren't sure exactly when, then the ITM options will maintain a percent to double figure that doesn't change much by expiration, all other factors being equal.
Percent to Double really amounts to another way of making a decision about which long options to purchase. And it is another way of showing that an option that has the least chance of success will gain the most percentage-wise if it does succeed.
Also see the "Choosing a long option Strike Price" discussion page for more information about long option purchase decisions.
Another way of visualizing percent to double is shown in the graphs below. In them, we have added a horizontal line representing the GAIN that is equal to the entry debit, which means a 100% GAIN, so you end up with twice what you started with. Also, the violet-colored lines and values that normally show breakeven points are now showing the stock price at the time the option doubles.
First we show the ITM 45 long call. You can see that the time lines are clustered tightly together at the 100% gain line, indicating that it doesn't make much difference if the gain happens now or later.
Next is the OTM 50 long call. The time lines are spread further apart at the double gain level. You can see that less stock movement is required for a double if it happens soon, and more stock movement is required for a double if happens later.
Last is the OTM 55 long call. Now the time lines are spread quite a ways apart at the double gain level, indicating that it makes a big difference if the gain happens now or later.
(Some people might question why the Double Gain lines are where they are. In the last graph for example, they might think the Double Gain line should be at 28, not 14. But remember that this type of option graph shows GAINS, not prices. If you invest $14 in the call, and you have a GAIN of $14, it means you now have $28, and you have doubled your money. The price of the option when you have the double gain is not shown on the graph, but you can infer that the example option must be worth .28 when you have a gain of $14. And indeed that shows up after expiration - to have a gain of $14 at expiration, the option goes .28 in-the-money.)