Delta

In option trading, delta is a measure of the sensitivity of an option’s price to changes in the price of the underlying asset. It indicates how much the option’s price is expected to change for a one-unit change in the price of the underlying asset.

Delta is expressed as a number between 0 and 1 for call options and between 0 and -1 for put options. The delta of a call option ranges from 0 to 1 because as the price of the underlying asset increases, the call option becomes more valuable. A delta of 1 means that the option’s price will move in lockstep with the price of the underlying asset. For example, if a call option has a delta of 0.7 and the price of the underlying asset increases by $1, the option’s price is expected to increase by $0.70.

On the other hand, the delta of a put option ranges from 0 to -1 because as the price of the underlying asset increases, the put option becomes less valuable. A delta of -1 means that the option’s price will move inversely with the price of the underlying asset. For example, if a put option has a delta of -0.5 and the price of the underlying asset increases by $1, the option’s price is expected to decrease by $0.50.

The delta of an option can also be used to determine the probability of the option expiring in-the-money. A call option with a delta of 0.5, for example, implies a 50% chance of the option expiring in-the-money.

Delta is an important concept in option trading as it helps traders assess the risk and potential profitability of their options positions. It allows traders to gauge how much the option’s price will move in relation to changes in the underlying asset’s price. By understanding delta, traders can make informed decisions about their options strategies and manage their risk effectively.