The Greeks - Understanding Option Delta
What is the Option Delta?
Delta measures the sensitivity of an option price in relation to its underlying asset price. Put simply, it’s how much an option’s price is expected to change per 1 unit change in the price of the underlying asset. For example, a Delta of 0.50 means that the option’s price will theoretically move 40p for every 80p move in the price of the underlying stock or index.
You will commonly see delta represented as a value between plus one and minus one.
Theoretically depending on how in or out-of-the-money an option is, they will of course have different values which are shown below and will change as the option moves.
Option Delta Examples
When a stock option gets very deep in the money (near 1 delta), it will begin to move like the underlying stock itself, moving almost point for point with the stock’s price. On the other hand, deep out-of-the-money options will only move a fraction of the move of the stock’s price.
When trading options, it’s important to know that you can use deltas to adjust a position to reflect your view. Investors may want to adjust exposure at certain points of ownership as they can view a collective delta for their entire position. For example, If you had a number of FTSE Index options that collectively had a delta of +2.95, theoretically this is the equivalent of almost 3 long FTSE Futures which is a bullish position.
By understanding the position by delta, you can help decide how you would like to reduce the risk using delta if you are uncomfortable with a position. Options can be a good way to fine-tune directional exposure at any time.
We can also use deltas to estimate probability. An option with a 0.25 delta theoretically has a 25% chance of expiring above the options strike price.