Option Greeks: DELTA (Part 1)

What is Delta?
Delta is a measure of the change in the option’s price resulting from a change in the underlying stock price. It estimates how much the theoretical value of option price will change when the price of the underlying stock changes by $1, assuming all other variables are unchanged.

Positive delta means that the option’s value will increase when the underlying stock price increases, and will decrease when the stock price decreases (positive relationship).
Negative delta means that the option’s value will increase when the underlying stock price drop, and will decrease when the stock price rises (negative relationship).

For Calls, the value of delta ranges from 0 to 1, whereas for Puts from -1 to 0.
Calls have a positive delta because Call premiums increases when the underlying stock price increases, and vice versa, assuming all other factors remain the same.
In contrast, Puts have a negative delta because the Put option price drops when the stock price goes up, and vice versa.

It is interesting to note that for every Strike Price in the Option Chain, if you add the absolute values of delta of Call & Put, the sum will always be 1.
For example, the delta of ABC Jun 60 Call is 0.25 and the delta of ABC Jun 60 Put is -0.75. The sum of their absolute values is: ¦0.25¦ + ¦-0.75¦ = 1.

Delta and the position in the market:
· Long calls have positive delta; short calls have negative delta.
· Long puts have negative delta; short puts have positive delta.
· Long stock has positive delta; short stock has negative delta.

Continue to “Delta - Part 2”.

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

Related Topics:
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Getting Started Trading
* FREE Trading Videos from Famous Trading Gurus