Delta (Δ) is a coefficient used to evaluate the change in the price of an option with fluctuations in the value of the underlying security by $1.
Delta values depend on the type of the option. The call option delta varies from 0 to 1. An increase in the price of the underlying security leads to an increase in the price of a call option. The put option delta varies from -1 to 0. A rise in the price of the underlying asset leads to a decrease in the price of a put option.
For instance, the delta indicator is equal to +0.75, which means that if the underlying security rises in price by $1 per share, the option on it will increase by $0.75. If a put option has a delta -0.2, and the price of the underlying asset rises by $1, the price of the put option will fall by $0.2.
What is Delta
The delta coefficient is an important indicator of the deal benefits. It is used to evaluate the investment portfolio of an enterprise, helps traders and brokers to make the next step (to buy, keep or sell securities and in what quantity). Delta is often used by brokers, which give their clients valuable information with calculation of delta prepared computer algorithms in real time. The coefficient is also used to assess insurance coverage, helping to calculate it. Delta is indispensable in different hedging strategies. Professional option traders decide how they will price their options using various price models (the most popular model is Black-Scholes model).
The behavior tracking of delta is very important for the portfolio of potential traders and investors: “in-the-money” (profitable now), “at-the-money” (the price of underlying asset at the moment) or “out-of-the-money” (not profitable now). Call options named “in-the-money” approach 1 as they come to expiration. A call option with a delta of 0,5 is called “at-the-money”. “Out-of-the-money” call options come near to 0 as expiration approaches.
These terms also apply to put options, but have the opposite meaning of call options. For example, “in-the-money” approaches -1, “out-of-the-money” put options come near to 0, “at-the-money” equals -0,5.
Delta spread is the ratio of options, fixed on a neutral position. This neutral ratio is determined by dividing the delta buying option by the delta selling option. This means that positive and negative deltas cancel each other out, so the total delta of the assets under consideration is equal to zero.
A calendar spread is the most popular type of delta spread trading, which is a way of trading with put and call options where you sell an option with a shorter expiration date and buy an option with a longer expiration date.
When hedging a portfolio that includes several options on the same asset, the portfolio delta will be equal to the sum of the deltas of the options included in it.
For instance, an investor has opened the following options contracts for shares of stock held by Company A (one option=100 shares of stock). First, he bought 80 call options with a delta of +0.45. Then, he sold 60 put options with a delta of -0.5. The portfolio delta in this case will be: 8000*(+0.45)—6000*(-0.5)=6600, which means that the portfolio can be made delta neutral by selling 6600 shares of Company A.
Delta of a share of stock
If the stock position is long, then the delta is +1.0, and vice versa, if the stock position is short, the delta is -1.0.