Delta in Options Trading: An Overview
Delta in Options Trading: An Overview of the most familiar Greeks, delta is a measure of an option’s sensitivity to shifts in the price of its underlying asset. It shows how much an option’s price will change for every $1 move in the underlying.
Traders often view delta as the probability that an option will end up in-the-money at expiration. For example, a call option with a strike price close to the market’s stock price has a Delta of.50, which translates to a 50% chance of being in-the-money at expiration. Delta also varies depending on how deep in-the-money a trade is and changes in implied volatility.
Understanding Delta: Your Key to Profiting in Options Trading
In general, as an option gets closer to expiration, its Delta will increase toward 1.00 and its Gamma will decrease (see Understanding Gamma for more). Delta isn’t the only factor that influences an option’s price; other factors include time remaining until expiration, skew and interest rate risk.
When you create spreads, calculating the Delta value of each leg is a good way to understand the overall exposure of your positions. Delta values can also help you determine whether you have a profit potential and when to take your profits or cut losses. In the next article, we’ll take a look at Vega, another important Greek that can help you maximize your returns or minimize your losses. Stay tuned!