Although some people may not be totally agreeable, there is another way how we can “interpret” Delta.

Options Guy’s Blog posted an article about another “definition” of delta:

**”Delta is the probability of the option contract being in-the-money at expiration”**.

I agree that this is not the theoretical definition of Delta. I still use delta data as per the theoretical definition, i.e. how much the option’s theoretical value will change when the stock price changes by $1.

But I do feel that the other “definition” of delta has helped me to understand more about some “behavior” of delta.

__For instance:__**Why for ITM options, for the same strike price, the longer days to expiration, the lower the delta?**

Because ITM option with more days to expiration has more time to move.

Options Guy argues that

*“more time to move means less likelihood of the option still being in-the-money at expiration; this translates into a smaller Delta”*.

And

**why for OTM options, for the same strike price, the longer days to expiration, the higher the delta?**

Options Guy argues that

*“if you’re buying OTM options, you need time for the stock to move up to the strike price. In other words, there’s a much higher probability of the underlying finishing ITM for the [longer to expiration] option than for the [nearer to expiration option]; Delta reflects that probability”*.

Likewise, we can also use the same logic to answer this question:

**Why a decrease in volatility will push the deltas of ITM Calls closer to 1 (-1 for Puts) and the OTM options’ delta closer to 0.**

Because decreased (implied) volatility means the future stock price fluctuation is expected to be lower. As a result, for ITM options, the probability of the options to be still in-the-money at expiration will be higher, which translates into a higher Delta.

On the other hand, for OTM options, decreased (implied) volatility would lower their probability to be in-the-money at expiration. And the lower delta reflects that probability.

Hope this can help you to better understand Delta too. :)

To read about other Option Greeks, go to: Option Greeks.

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__Related Topics:__* OPTION PRICING: How Is Option Priced?

* Options Trading Basic – Part 2

* Difference Between Option’s Volume and Open Interest

## 2 comments:

Great Work dude......

Loved it....You seriously have done sum kick ass work man..

Thanks a lot....

Peace...

Thanks for helping me understand the Greeks a little better... Michael

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