by buying backthe puts.
■
Time decay will be eroding the value of your put every day, so all otherthings being equal, the put you sold will be declining in price every day,allowing you to buy it back for less than you bought it for, unless theunderlying stock has fallen of course.
1.4.2 ContextOutlook■
Bullish—You are expecting the stock to rise or stay sideways at a minimum.
Rationale■
To pick up short-term premium income as the share develops price strength.
■
To lower the cost basis of buying a share (if the put is exercised).
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Net Position■
This is a net credit transaction because you receive a premium for selling theput.
■
Your maximum risk is the put strike price less the premium you receive for theput. This is considered a high-risk strategy.
■
Your maximum reward is limited to the premium you receive for the option.
Effect of Time Decay■
Time decay works with your naked sold option. To take advantage of the maximum rate of time decay, sell the put in the last month before the option’sexpiration.
■
Don’t be fooled by the false economy that options with longer to expiration aremore lucrative. Compare a one-month option to a 12-month option and multiply the shorter option price by 12. You will see that you are receiving far moreper month for the one-month option.
Appropriate Time Period to Trade■
One month or less.
Selecting the Stock■
Choose from stocks with adequate liquidity, preferably over 500,000 AverageDaily Volume (ADV).
■
Try to ensure that the trend is upward and identify a clear area of support.
Selecting the Option■
Choose options with adequate liquidity; open interest should be at least 100,preferably 500.
■
Strike—Look for OTM (lower strike) options, below the current stock price.
■
Expiration—Give yourself as little time to be wrong; remember that your shortposition exposes you to uncapped risk (until the stock falls to zero) and thattime decay accelerates exponentially (in your favor when you’re short) in thelast month before expiration, so only short the option with a maximum of onemonth to expiration, preferably less.
1.4.3 Risk Profile■
Maximum Risk
[Put strike  put premium]
■
Maximum Reward
[Put premium]
■
Breakeven
[Put strike  put premium]
The Four Basic Options Strategies
1.4.4 Greeks
Risk ProfileAs the stock pricefalls, the naked putmoves into loss moreand more quickly,particularly when thestock price is lowerthan the strike price.DeltaDelta (speed) is positive and falls to zeroafter the positionreaches its maximumprofit potential afterthe stock has risenabove the strike price.GammaGamma (acceleration)is always negativewith a naked put(because you are netseller of options), andit peaks inverselywhen Delta is at itsfastest (steepest)rate, which is whenthe position is ATM.
Key:ExpirationToday – 6 monthsTime(t) – 1 monthRisk Profile
Theta
ThetaTheta is positive,illustrating that timedecay helps thenaked put position.
Delta
Vega
VegaVega is negative,illustrating thatvolatility is harmful tothe position becausehigher volatility translates into higheroption values.
Gamma
Rho
RhoRho is positive, illustrating that higherinterest rates wouldhelp the naked putposition.
1.4.5 Advantages and DisadvantagesAdvantages■
If done correctly, you can use Naked Puts to gain a regular income from risingor rangebound stocks.
■
The Naked Put is an alternative way of buying a stock at a cheaper price thanin the current market. This is because if you’re exercised, you’re obligated tobuy stock at the low strike price, having already received a premium forselling the puts in the first place.
Disadvantages■
Naked Puts expose you to uncapped risk (as the stock falls to zero) if the stock falls.
■
Not a strategy for the inexperienced. You must only use this strategy on stocksyou’d love to own at the put strike price you’re selling at. The problem is that if
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you were to be exercised, you’d be buying a stock that is falling. The way to avoidthis is to position the put strike around an area of strong support within the context of a rising trend. A Fibonacci retracement point would be the type of areayou’d use to position your naked put strike . . . well below the current stock price.
1.4.6 Exiting the TradeExiting the Position■
Buy back the options you sold or wait for the sold put to expire worthless sothat you can keep the entire premium.
Mitigating a Loss■
Use the underlying asset or stock to determine where your stop loss should beplaced.
1.4.7 ExampleABCD is trading at $27.35 on May 12, 2004.Sell the June 2004 $25.00 strike put for $1.05.You Receive
Put premium$1.05
Maximum Risk
Strike price  put premium$25.00  $1.05  $23.95
Maximum Reward
Put premium$1.05
Breakeven
Strike price  put premium$25.00  $1.05  $23.95
Return on Risk
4.38%
Cushion (from Breakeven)
$3.40 or 12.43%
2Income StrategiesIntroductionOptions uniquely enable us to enhance our returns by way of combining buy/selllegs so that we can generate income on a regular basis. Income strategies are characterized typically by being short-term strategies, whereby option premium is soldon a monthly basis. Many investors generate significant percentage returns in thisway, even if the underlying stock hasn’t moved. Imagine collecting income whenyour chosen stock hasn’t even moved at all.As with all aspects of trading, it’s crucial to be level-headed and not to get greedy.A 3–4% return every month is very significant when compounded to an annual rate.Would you take a 30% return on your money every year? Of course you would . . .or at least you should! I know you aspire for more, and that’s ok, but remember thatfund managers would kill for such returns, though remember that they are fetteredby all kinds of regulatory and compliance criteria that the private investor never hasto worry about.The basic income strategies outlined here can be employed by traders of all levels and experience. Don’t get hung up on thinking that complex strategies mustyield higher returns. That simply isn’t the case. Higher returns are generated bygood trading plans that are consistently executed time after time. Some of the greatest traders execute the same simple processes over and over again. The challengethey have is to keep their enthusiasm up year after year.In short, there is nothing wrong with choosing a Covered Call as your staple strategy, and don’t let “option snobs” tell you otherwise! Naked Puts are also incrediblysimple, but unless you have sufficient experience (and collateral in your account!), abroker may not let you trade them because of the perceived risk. In such a case, youcan create a Bull Put Spread by buying a lower strike put, which will have the effectof capping the risk of the Naked Put.
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Income Strategies StaircaseThis diagram shows how the various income strategies link together, highlightingtheir similarities and differences. You may want to complete the chapter first beforecoming back to this diagram so you can better appreciate the links.
Covered Call
lookslike
improve yield bysubstituting thestock for adeep ITMlong-term call
Naked Put
buyput
Bull PutSpread
theoppositeof which is
Bear CallSpread
Income
StrategiesCoveredShortStraddle
Bull Put + Bear Call =Staircase
too risky andcertainty ofexercise
CoveredShortStrangle
Long IronCondor
stilltoorisky
CalendarCall
eliminateupsiderisk
Long IronButterfly
DiagonalCall
Combining Strategies
The opposite of a Bull Put spread is a Bear Call Spread, and the combination of thetwo forms a Long Iron Butterfly. There are several ways in which a Covered Call canbe enhanced, but the best way is by substituting the stock with a Deep In the Money,long term call option, creating a Diagonal Call. This has the effect of increasing theyield and reducing the cost basis. However, there are nuances that must be understood before jumping into Diagonal Calls, and we’ll cover these points in theDiagonal Call Guide.We’ll also add in another three strategies (the Calendar Put, Diagonal Put, andCovered Put), though we would rarely, if ever, seek to use them for reasons that we’llcover in those sections.
Income Strategies
2.1 Covered CallProficiency
Direction
Volatility
Asset Legs
N/ANovice
Bullish
Max Risk
■ Long Stock
Max Reward
Strategy Type
Capped
Income
!
Capped*
■ Short Call
*Risk uncapped until the stock falls to zero.
2.1.1 DescriptionThe Covered Call is the most basic of income strategies, yet it is also highly effectiveand can be used by novices and experts alike.The concept is that in owning the stock, you then sell an Out of the Money calloption on a monthly basis as a means of collecting rent (or a dividend) while youown the stock.If the stock rises above the call strike, you’ll be exercised, and the stock will besold . . . but you make a profit anyway. (You’re covered because you own the stockin the first place.) If the stock remains static, then you’re better off because you collected the call premium. If the stock falls, you have the cushion of the call premiumyou collected.On occasion, it’s attractive to sell an In the Money or At the Money call while youalready own the stock. In such cases, the premium you collect will be higher, as willthe likelihood of exercise, meaning you’ll end up delivering the stock at the strikeprice of the sold call.
Buy stock
Sell OTM call
Covered Call
Steps to Trading a Covered Call1. Buy (or own) the stock.2. Sell calls one or two strike prices out of the money [OTM] (i.e., calls with strikeprices one or two strikes price higher than the stock).■
If the stock is purchased simultaneously with writing the call contract, thestrategy is commonly referred to as a “buy-write.”
■
Generally, only sell the calls on a monthly basis. In this way you will capture more in premiums over several months, provided you are not exercised. Selling premium every month will net you more over a period oftime than selling premium a long way out. Remember that whenever you
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are selling options premium, time decay works in your favor. Time decay isat its fastest rate in the last 20 trading days (i.e., the last month), so whenyou sell option premiums, it is best to sell them with a month left, and do itagain the following month.■
Remember that your maximum gain is capped when the stock reaches thelevel of the call’s strike price.
■
If trading U.S. stocks and options, you will be required to buy (or be longin) 100 shares for every options contract that you sell.
Steps In■
Some traders prefer to select stocks between $10.00 and $50.00, consideringthat above $50.00, it would be expensive to buy the stock. Ultimately it’swhat you feel comfortable with.
■
Try to ensure that the trend is upward or rangebound and identify a cleararea of support.
Steps Out■
Manage your position according to the rules defined in your Trading Plan.
■
If the stock closes above the strike at expiration, you will be exercised. Youwill deliver the stock at the strike price, whilst having profited from boththe option premium you received and the uplift in stock price to reach thestrike price. Exercise is automatic.
■
If the stock remains below the strike but above your stop loss, let the callexpire worthless and keep the entire premium. If you like, you can thenwrite another call for the following month.
■
If the stock falls below your stop loss, then either sell the stock (if you’reapproved for naked call writing) or reverse the entire position (the call willbe cheap to buy back).
2.1.2 ContextOutlook■
With a Covered Call, your outlook is neutral to bullish. You expect a steadyrise.
Rationale■
To buy (or own) a stock for the medium or long term with the aim of capturingmonthly income by selling calls every month. This is like collecting rent forholding the stock and will have the effect of lowering your cost basis ofholding the stock.
Income Strategies■
If the stock rises, your short call may be exercised, in which case you willmake some profit. If you are exercised, then your shares will be sold.
■
If the stock falls, your sold call will expire worthless, and you will keep thepremium, thus enabling you to have bought the stock cheaper (because youoffset the received premium against the price you paid for the stock).
Net Position■
This is a net debit transaction because you are paying for the stock and onlytaking in a small premium for the sold call options. You can increase youryield by purchasing the stock on margin, thereby doubling your yield if youuse 50% margin.
■
Your maximum risk is the price you paid for the stock less the premium youreceived for the call.
Effect of Time Decay■
Time decay is helpful to your trade here because it should erode the value ofthe call you sold. Provided that the stock does not hit the strike price at expiration, you will be able to retain the entire option premium for the trade, thusreducing your original cost of buying the share.
Appropriate Time Period to Trade■
Sell the calls on a monthly basis.
Selecting the Stock■
Choose from stocks with adequate liquidity, preferably over 500,000 AverageDaily Volume (ADV).
■
Select a stock price range you feel comfortable with. Some traders prefer lowerpriced stocks; others don’t have a preference. Ultimately the direction of thestock is more important.
■
Try to ensure that the trend is upward or rangebound and identify a clear areaof support.
Selecting the Option■
Choose options with adequate liquidity; open interest should be at least 100,preferably 500.
■
Strike—Look for either the ATM or just OTM (higher) strike above the currentstock. If you’re bullish, then choose a higher strike; if neutral, choose the ATMstrike.
■
Expiration—Look at either of the next two expirations and compare monthlyyields. Look for over 3% monthly initial cash yield.
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2.1.3 Risk Profile■
Maximum Risk
[Stock price paid  call premium]
■
Maximum Reward
[Call strike  stock price paid]  call premium
■
Breakeven
[Stock price paid  call premium]
2.1.4 GreeksKey:ExpirationToday – 2 monthsTime(t) – 10 daysRisk ProfileAs the stock pricerises, the covered callmoves into profit butslows down as itapproaches the strikeprice and maximumprofit.
Risk Profile
Theta
ThetaTheta is positive,illustrating that timedecay is helpful tothe position.
DeltaDelta (speed) is positive and falls to zeroas the asset pricerises above the strikeprice and the maximum profit isachieved.
Delta
Vega
VegaVega is negative,illustrating thatvolatility is harmfulto the position.
GammaGamma (acceleration)is always negativewith this positionbecause you are anet seller of calls.
Gamma
Rho
RhoRho is negative, illustrating that higherinterest rates wouldbe harmful to theposition.
2.1.5 Advantages and DisadvantagesAdvantages■
Generate monthly income.
■
Lower risk than simply owning the stock.
■
Can profit from rangebound stocks.
Income Strategies
Disadvantages■
Some traders consider this to be an expensive strategy in terms of cash outlay.For regular stock traders, this is not true. For traders who only trade options,then it is true but is not particularly relevant.
■
Capped upside if the stock rises.
■
Uncapped downside if the stock falls, cushioned only by the call premiumreceived.
2.1.6 Exiting the TradeExiting the Position■
If the share rises above the strike price, you will be exercised and thereforemake a profit.
■
If the share stays below the strike price, you will have successfully reducedyour cost of entry because the premium you took in will offset the price youpaid for the stock. You will retain the entire option premium you receivedbecause it will expire worthless.
■
If the share plummets, then your exit depends on what type of account you have:■
If your account permits you to sell naked options, then you will be able tosell the share and let the option expire worthless. Because the option willhave declined in value so much, you may consider buying it back to avoidany contingent losses that could occur if the share suddenly bounced backup after you sold it. You should take extreme care if holding an uncoveredShort Call position because you will be exposed to uncapped risk potential.
■
If your account does not permit you to sell naked options and you’re notsufficiently experienced, then you should buy back the options you soldand consider selling the stock, too. This is the safest way to exit a losingcovered call trade.
Mitigating a Loss■
Either sell the share or sell the share and buy back the option you sold.
■
Another tactic could be to buy a put option as well, which would then coveryour downside risk. Your yield would be reduced, but so would your maximum risk. See Collar.
2.1.7 ExampleABCD is trading at $28.20 on February 25, 2004.Buy the stock for $28.20.Sell the March 30, 2004 strike call for $0.90.
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You Pay
Stock price – call premium28.20  0.90  27.30
Maximum Risk
Stock price – call premium28.20  0.90  27.30Maximum risk of $27.30 is 100% of your total costhere
Maximum Reward
Limited to the call premium received plus the callstrike less the stock price paid0.90  30.00  28.20  2.70
Breakeven
Stock price – call premium received28.20  0.90  27.30
Initial Cash Yield(Also Cushion)
3.19%
Maximum Yield if Exercised
9.57% (if the stock reaches $30.00 at expiration).
2.2 Naked PutWe know from Chapter 1, “The Four Basic Options Strategies,” that a Covered Calllooks like a Naked Put. We won’t repeat an entire section on the Naked Put(Section 1.4), but this is the natural place for the Naked Put to reside, so please referto it now so you can compare it with the Covered Call. These are the two basicincome strategies, although those without Level 3 account status won’t be able totrade naked options strategies.After you’ve reviewed the Naked Put again, please move on to the Bull Put Spread.
2.3 Bull Put SpreadProficiency
Direction
VolatilityN/A
Intermediate
Bullish
Asset Legs■ Long Put
Max Risk
Max Reward
Strategy Type
Capped
Income
!
Capped
■ Short Put
2.3.1 DescriptionThe Bull Put spread is an intermediate strategy that can be profitable for stocks thatare either rangebound or rising.The concept is to protect the downside of a Naked Put by buying a lower strikeput to insure the one you sold. Both put strikes should be lower than the currentstock price so as to ensure a profit even if the stock doesn’t move at all.The lower strike put that you buy is further OTM than the higher strike put thatyou sell. Therefore you receive a net credit because you buy a cheaper option than theone you sell, thereby highlighting that options are cheaper the further OTM you go.
Income Strategies
If the stock rises, both puts will expire worthless, and you simply retain the netcredit.If the stock falls, then your breakeven is the higher strike less the net credit youreceive. Provided the stock remains above that level, then you’ll make a profit.Otherwise you could make a loss. Your maximum loss is the difference in strikes lessthe net credit received.
Buy lower strike put
Sell OTM put
Bull Put Spread
Steps to Trading a Bull Put Spread1. Buy lower strike puts.2. Sell the same number of higher strike puts with the same expiration date.■
Both strikes should be lower than the current stock price.
Steps In■
Try to ensure that the trend is upward or rangebound and identify a cleararea of support.
Steps Out■
Manage your position according to the rules defined in your Trading Plan.
■
If the stock falls below your stop loss, then buy back the short put orunravel the entire position.
■
If the stock remains above the higher strike put, the options will expireworthless, and you’ll retain the net credit.
2.3.2 ContextOutlook■
With bull puts, your outlook is bullish or neutral to bullish.
Rationale■
To execute a bullish income trade for a net credit whilst reducing your maximum risk. The bought puts will have the effect of limiting your downside,whilst the sold puts produce the income element.
Net Position■
This is a net credit trade because your bought puts will be cheaper than your soldputs, which are further out of the money. (Remember that calls and puts work inthe opposite way to each other—an OTM call is an ITM put and vice versa.)
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Your maximum reward on the trade itself is limited to the net credit of the soldputs less the bought puts. Your maximum risk on the trade is the differencebetween the strike prices less your net credit.
Effect of Time Decay■
Time decay is helpful to this position when it is profitable and harmful when itis loss-making. Remember, if you’re buying and selling OTM options to make anet credit, you’ll make a profit if the stock doesn’t move. Therefore, you wantto trade this type of strategy in short time periods only. If the position becomesunprofitable, time decay will start to work against you because the nearer youare to expiration, the nearer you’ll be to making your maximum loss.
Appropriate Time Period to Trade■
It’s safest to trade this strategy on a short-term basis, preferably with onemonth or less to expiration.
Selecting the Stock■
Choose from stocks with adequate liquidity, preferably over 500,000 AverageDaily Volume (ADV).
■
Try to ensure that the trend is upward or rangebound and identify a clear areaof support well above the higher strike price.
Selecting the Options■
Choose options with adequate liquidity; open interest should be at least 100,preferably 500.
■
Lower Strike—Typically $5.00 below the higher strike, but it can be $2.50below or more. The key is to try to find a decent cushion for downside protection while also securing a decent yield, preferably over 10%, which typicallymeans around $0.50 net credit for a $5.00 spread between the strikes.
■
Higher Strike—Try to give yourself at least a 10% cushion below the currentstock price; the level of cushion will depend on how close you are to therelevant expiration date.
■
Expiration—One month or less. Use the same expiration date for both legs.
2.3.3 Risk Profile■
Maximum Risk
[Difference in strikes  net credit]
■
Maximum Reward
[Net credit received]
■
Breakeven
[Higher strike  net credit]
Income Strategies
2.3.4 GreeksKey:ExpirationToday – 1 monthTime(t) – 5 daysRisk ProfileAs the stock pricefalls, the Bull Putmoves into loss andreaches the maximumloss when the stockfalls to the lowerstrike price.
Risk Profile
Theta
ThetaTime decay is harmfulto the position whenit is OTM and helpfulwhen it is ITM.
DeltaDelta (speed) is positive and is at itsfastest in betweenthe strikes. Noticehow Delta slowsdown when theposition is deepITM or OTM.
Delta
Vega
VegaVolatility is helpful tothe position when itis OTM and harmfulwhen it is ITM.
GammaGamma (acceleration)peaks below thelower (bought) strikeand peaks inverselyabove the higher(sold) strike.
Gamma
Rho
RhoHigher interest ratesare generally helpfulto the position.
2.3.5 Advantages and DisadvantagesAdvantages■
Short-term income strategy not necessarily requiring any movement of thestock.
■
Capped downside protection compared to a Naked Put.
Disadvantages■
Maximum loss is typically greater than the maximum gain, despite the cappeddownside.
■
High yielding trades tend to mean less protective cushion and are thereforeriskier.
■
Capped upside if the stock rises.
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2.3.6 Exiting the TradeExiting the Position■
With this strategy, you can simply unravel the spread by buying back the putsyou sold and selling the puts you bought in the first place.
Mitigating a Loss■
Unravel the trade as described previously.
■
Advanced traders may choose to only partially unravel the spread leg-by-leg.In this way, they leave one leg of the spread exposed in order to attempt toprofit from it.
2.3.7 ExampleABCD is trading at $27.00 on May 12, 2004.Buy the June 2004 20 strike put for $0.50.Sell the June 2004 25 strike put for $1.00.Net Credit
Premium sold  premium bought1.00  0.50  0.50
Maximum Risk
Difference in strikes  net credit5.00  0.50  4.50Maximum risk is greater than your net credit
Maximum Reward
Net credit0.50
Breakeven
Higher strike  net credit25.00  0.50  24.50
Max ROI
11.11%
Cushion
$2.50 or 9.26% from breakeven
2.4 Bear Call SpreadProficiency
Direction
VolatilityN/A
Intermediate
Bearish
Asset Legs■ Short Call
Max Risk
Max Reward
Strategy Type
Capped
Income
!
Capped
■ Long Call
2.4.1 DescriptionThe Bear Call Spread is an intermediate strategy that can be profitable for stocks thatare either rangebound or falling.
Income Strategies
The concept is to protect the downside of a Naked Call by buying a higher strikecall to insure the one you sold. Both call strikes should be higher than the currentstock price so as to ensure a profit even if the stock doesn’t move at all.The higher strike call that you buy is further OTM than the lower strike call thatyou sell. Therefore, you receive a net credit because you buy a cheaper option than theone you sell, thereby highlighting that options are cheaper the further OTM you go.If the stock falls, both calls will expire worthless, and you simply retain the netcredit.If the stock rises, then your breakeven is the lower strike plus the net credit youreceive. Provided the stock remains below that level, then you’ll make a profit.Otherwise you could make a loss. Your maximum loss is the difference in strikes lessthe net credit received.
Sell lower strike call
Buy OTM call
Bear Call Spread
Steps to Trading a Bear Call Spread1. Sell lower strike calls.2. Buy the same number of higher strike calls with the same expiration date.■
Both strikes should be higher than the current stock price.
Steps In■
Try to ensure that the trend is downward or rangebound and identify aclear area of resistance.
Steps Out■
Manage your position according to the rules defined in your Trading Plan.
■
If the stock rises above your stop loss, then buy back the short call orunravel the entire position.
■
If the stock remains below the lower strike call, the options will expireworthless, and you’ll retain the net credit.
2.4.2 ContextOutlook■
With bear calls, your outlook is bearish or neutral to bearish.
Rationale■
To execute a bearish income trade for a net credit while reducing your maximum risk. The bought calls will have the effect of limiting your risk, while thesold calls produce the income element.
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Net Position■
This is a net credit trade because your bought calls will be cheaper than yoursold calls, which are further out of the money.
■
Your maximum reward on the trade itself is limited to the net credit of the soldcalls less the bought calls. Your maximum risk on the trade is the differencebetween the strike prices less the net credit received.
Effect of Time Decay■
Time decay is helpful to this position when it is profitable and harmful when itis loss-making. Remember, if you’re buying and selling OTM options to makea net credit, you’ll make a profit if the stock doesn’t move. Therefore, you wantto trade this type of strategy in short time periods only. If the position becomesunprofitable, time decay will start to work against you because the nearer youare to expiration, the nearer you’ll be to making your maximum loss.
Appropriate Time Period to Trade■
It’s safest to trade this strategy on a short-term basis, preferably with onemonth or less to expiration.
Selecting the Stock■
Choose from stocks with adequate liquidity, preferably over 500,000 AverageDaily Volume (ADV).
■
Try to ensure that the trend is downward or rangebound and identify a cleararea of resistance well below the lower strike price.
Selecting the Options■
Choose options with adequate liquidity; open interest should be at least 100,preferably 500.
■
Lower Strike—Try to give yourself at least 10% cushion above the currentstock price; the level of cushion will depend on how close you are to therelevant expiration date.
■
Higher Strike—Typically $5.00 above the lower strike, but it can be $2.50above or more. The key is to try to find a decent cushion for protection whilealso securing a decent yield, preferably over 10%, which typically meansaround $0.50 net credit for a $5.00 spread between the strikes.
■
Expiration—One month or less. Use the same expiration date for both legs.
2.4.3 Risk Profile■
Maximum Risk
[Difference in strikes  net credit]
■
Maximum Reward
[Net credit received]
■
Breakeven
[Lower strike  net credit]
Income Strategies
2.4.4 GreeksKey:ExpirationToday – 1 monthTime(t) – 5 daysRisk ProfileAs the stock pricerises, the Bear Callmoves into loss andreaches the maximumloss when the stockrises to the higherstrike price.
Risk Profile
Theta
ThetaTime decay is harmfulto the position whenit is profitable andhelpful when itis unprofitable.
DeltaDelta (speed) is negative and