Options Delta : The Basics
Options Delta is the ratio of the change in the price of the stock option to the change in the price of the underlying stock
Delta = instantaneous change in value of asset with respect to an underlying risk factor. Option’s delta changes continuously as underlying risk factor changes
Here are some basic characteristics of Options Delta :
 It is the change in the price of an option for a one point moves in the underlying
 Delta of a call option is positive
 Delta of a put option is negative
 Delta increases – in decreasing index
 Delta decreases – in increasing index
 Call options: 0 < Option Delta < 1
 Put options: 1 < Option Delta < 0
 Inthemoney options: Delta Option approaches 1 (call:+1,put:1)
 Atthemoney options: Delta is about 0.5 (call:+0.5, put: 0.5)
 Outofthemoney options: Delta Option approaches 0
 Call Option Delta can be interpreted as the probability that the option will finish in the money

An atthemoney option : which has a delta of approximately 0.5, has roughly a 50/50 chance of ending up inthemoney
 Put Option Delta can be interpreted as 1 times the probability that the option will finish in the money
Impact of Time : As time passes, the delta of Inthemoney options: increases & Outofthemoney options: decreases
Impact of Volatility : As volatility falls, the delta of Inthemoney options: increases & Outofthemoney options: decreases
Hedging using Options – Delta to neutralize market risk :
 In order to maintain a riskless hedge using an option and the underlying stock, need to adjust holdings in the stock periodically
 An important parameter in pricing and hedging of options
 No. of units of stock should hold for each option shorted in order to create a riskless hedge
 Construction of a riskless hedge is sometimes referred as delta hedging
To get more information on Options Greeks , read Options Basics of Vega , Gamma
“The greatest ignorance is to reject something you know nothing about”…If you are invested in Markets, it makes sense to be aware of & have an idea about Options.
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