Option Greeks Explained: Delta

The first and most commonly used greek term in options trading is “delta“.   Simply put, delta measures how much an options value (price) will change with a $1 move in the underlying.  When you buy a stock, you make $1 for every $1 the stock rises.  The same is not true for options as “delta” governs this relationship.

• Long calls (buy a call) have a positive delta while short call (sell a call) have a negative delta
• Long puts (buy a put) have a negative delta while short put (sell a put) have a positive delta

Positive Delta: An option position with a positive delta will increase in value as the underlying rises and decrease in value as the underlying falls – a direct relationship.

For Example: You buy a call option for $1.00 (debit of $100) with a delta of +30 [+0.30*100].  As the underlying moves up by $1, the position will now be worth $1.30 ($130), a profit of $30 (option delta).  However, as the underlying falls by $1 the position will lose $0.30 ($30) as the options value will drop from $1.00 to $0.70.

Negative Delta: An option position with a negative delta will decrease in value as the underlying rises and increase in value as the underlying falls – an indirect relationship.  As the underlying goes up, the options value goes down and vice versa.  Delta will allow you to determine how your position will react to a $1 move in the underlying.

For Example: You buy a put option for $2.00 (debit of $200) with a delta of -70 [-0.70*100].  As the underlying moves up by $1, the position will now be worth $1.30 ($130), a loss of $70 (option delta).  However, as the underlying falls by $1 the position will gain $0.70 ($70) as options value will rise from $2.00 to $2.70.

Other Features of Delta:

The delta of an option can range from 0 to 100.  ATM (at-the-money) options have a delta of around 50 and as an option gets deeper ITM (in-the money), the delta of that option approaches 100.  Delta can also be loosely used as the probability of an option expiring ITM.  Hence, an option with a 50 delta has a 50% chance be expiring ITM.