The delta ∆ of an option corresponds to the rate of change of the price of this option relative to the underlying. It materializes the « speed » with which the option increases in value following a change in the price of the underlying.
Let us have an example.
A delta of 0.35 means that for every $ 1 the Underlying rises :
- the Call will increase by $0.35.
- the Put option will drop by $0.35.
This means :
- The (long) Call option has a positive delta, between 0 and 1.
- The (long) Put option has a negative delta, between -1 and 0.
|Long Call||Short Call|
|Short Put||Long Put|
In practice – cheat sheet.
- 100 – 2 x delta ≤ POP≤ 100 – delta
For example 16 ∆ : 68% ≤ POP≤ 84%
- The value of Delta is approximately the probability the option ends ITM.
For example, a 16 ∆ means a 16% probability of being ITM.
- Twice the delta is the probability of the option being touch, this means the option is ITM for a while.
- 16 ∆ corresponds to 1 standard deviation (16∆ means 0.160).
- Share equivalence 1 share is 1∆.
- Delta neutrality: the best way to reduce the risk of the portfolio is to have an entire portfolio delta around 0.
This means the portfolio has no directional exposure. In the case of a big market moves the portfolio will be less at risk than if it was wrong directionally oriented.
To know more about options, you can have a look at the options Academy.