Delta-Target vs Fixed-Moneyness Rolls
When an option strategy rolls to a new expiry, it can pick the new strike by delta or by moneyness — the two rules pick different strikes whenever volatility has moved.
A systematic options strategy — a covered call program, a put-selling overlay — has to decide which strike to sell every time the old option expires or is closed out. There are two common ways to pick the new strike: fixed-moneyness, which always sells a strike a fixed percentage away from spot (say, 5% out-of-the-money), and delta-target, which always sells whatever strike currently has a given delta (say, 25-delta).
Fixed-moneyness sells the same distance from spot every time; delta-target sells the same probability-weighted distance — and the two diverge whenever implied volatility changes, because delta compresses that distance when vol is high and stretches it when vol is low.
The difference shows up the moment volatility moves. A 25-delta strike sits roughly one standard deviation of expected move away from spot, so when implied volatility rises, the 25-delta strike moves further from spot in price terms — the option seller is automatically pushed further out-of-the-money, taking a similar amount of assignment risk. A fixed-moneyness rule, sitting a constant 5% away regardless of volatility, effectively sells options with more delta (more risk) exactly when volatility is elevated, since a fixed price distance covers less of the expected move.
Practically, delta-targeting produces more consistent option-selling risk and premium-per-trade through changing vol regimes, which is why most institutional overwriting and put-selling programs specify their roll rule in delta, not in percent-of-spot. Fixed-moneyness is simpler to implement and easier to explain to an investor, but it lets risk drift with the vol cycle unless it's rebalanced manually.
Practice in interviews
Further reading
- Natenberg, Option Volatility and Pricing (ch. 19)