4.1.6.2. Delta
Delta is a measure of an option’s price sensitivity. It measures how much the price of an option changes with a small change in the price of an underlying asset. If the price of an underlying asset moves 1% and the option premium moves 0.7%, the option’s delta is 70%. Put another way, if an option has a delta of 70%, then for any $1 change in the price of the underlying asset, the option’s premium will change by 70 cents. This means that the option is 70% as price sensitive as the underlying asset.
Delta values range from -1.0 to 1.0. Calls are always positive; puts are negative. The delta of a call is always positive because the value of a call increases as the price of the underlying increases. A put’s delta is always negative because the value of a put decreases with an increase in the price of the underlying. The absolute value of delta cannot exceed 1.0 because the value of an option can never increase or decrease more than the underlying asset.
At-the-money calls and puts hover around 0.5. This means that they have a roughly 50% chance of finishing either in or out of the money. In-the-money puts and calls have a higher absolute value; out-of-the-money puts and calls have a lower absolute value. If an option is far out of the money, the price of the premium won’t move much with changes in the underlying, and the delta will hover near zero. If an option is way in the money, its premium will increase on a nearly one for one ratio with changes in the underlying.
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Delta for Calls and Puts |
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Out of the Money |
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