Delta ratio represented by the Greek letter Δ, is an important tool for controlling risk in options trading. Delta (Δ) is the ratio of the change in price of a derivative call option to the change in price of the underlying instrument. It is the sensitivity of an option’s price to changes in the underlying instrument’s price.
The Delta values range from -1 to +1. The Δ of a call option ranges from 0 to 1, while a Δ for a put option, it ranges from -1 to 0. A delta (Δ) value of zero (0) indicates an option where the premium price hardly moves relative to price changes in the underlying instrument. A delta (Δ) of 0.7 indicates that the option price will increase by 0.7 for every one dollar rise in the underlying security’s price. A Delta closer to +1 or -1, means a greater change in the option price when the underlying moves.
Buying a call derivative option will result in positive Δ while selling short a call option results in negative Δ. Buying a put results in negative Δ; while selling short a put results in positive Delta.
If an option has a Δ of 0.30 it has a 30% chance of finishing in-the-money (ITM). A delta of 0.50 suggests it has a 50% – 50% chance of finishing in-the-money (ITM).
An increasing Δ suggests that the option is becoming very sensitive to the underlying security and the options premium is comprised of mostly intrinsic value.
What Affects Delta (Δ)
Delta usually increases as it gets close to expiration for at-the-money options.
The ratio increases, as an option moves further in the money and falls as it moves further out of the money (OTM).
High volatility in stock price increases the Δ value of both call and put options.
As expiration nears, in-the-money call Deltas increase toward 1.00, at-the-money call Deltas remain around 0.50 and out-of-the-money call Deltas trade toward 0 provided other variables remain constant.
The change in Δ is measured by another risk measure with the Greek letter, known as Gamma (Γ).
You can find more about the Greeks in CME Group.
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