A Deep Dive Into Option Delta2 min readReading Time: 2 minutes
How much does an option’s price move as the price of the underlying asset changes? Delta can tell us.
What Does Delta Measure?
Delta measures how much the option price will increase or decrease as the underlying stock or asset’s price changes. Delta values fall between 0 and 1 for call options and -1 and 0 for put options. Delta tells us how much the option price will increase or decrease as the underlying stock or asset’s price changes. A deep in the money option which is nearing it’s expiry date will move nearly 100% with its underlying stock if it has a delta of 1.00.
Whenever a trader is long a call option, the delta will always be a positive number between 0 and 1. This means that the value of the call option increases by the call option’s delta value. And when the asset’s price decreases, the value of the call option will also decrease by delta.
The Odds Of An Option Expiring ITM or OTM
Delta also tells us the odds of an option expiring in the money.
An ATM option has 50% chance of it going either way on the expiry date if it has a delta of 0.50. A far OTM option with a delta of 0.10 means that the option only moves one tenth in step with the underlying asset implying that there is a 90% that this option will expire worthless.
Option sellers love writing low delta option contracts. Why? Because there is a high probability of keeping the premium as a profit. Options with 0.10 delta can be looked at as lottery tickets with low odds of success.
An option’s position can also be delta hedged using shares of the underlying stock. When a trader gets into a delta neutral position, his overall delta is zero, which reduces the options’ price movements with respect to the stock.
For example, assume a trader is long 100 call options on a stock with a delta of 0.75. In this case, the trader can hedge the call by shorting 75 shares of the underlying stocks.
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