Delta is a ratio that compares the change in the price of an asset, typically marketable securities, to the comparable change in the price of its derivative. For example, if a stock option has a delta value of 0.50 and the underlying stock increases in price by $1 per share, the option on it will rise by $0.50 per share.
Delta can be positive or negative. It can be between 0 and 1 for a call option, as the underlying asset increases in price, or -1 to 0 for a put option because as the underlying asset price increases the value of the put option decreases.
How delta works
As an important variable related to the pricing model used by option sellers, delta can help option buyers and sellers determine how option prices are likely to change as the underlying security price rises and falls.
Delta is calculated in real-time by sophisticated computer algorithms that continuously publish the delta values to broker clientele. Traders and investors can then use this information to help inform their decisions when buying or selling options.
Call option delta behavior relates to whether the option is in-the-money meaning it is currently profitable, at-the-money meaning it equals the current underlying stock price or out-of-the-month meaning it is not currently profitable.
Typically, in-the-money options have a delta ratio of close to 1, at-the-money options are around 0.5 and out-of-the-money options are closer to 0. Understanding delta and how to use it to inform decisions can help investors make better investment choices.
What else do you need to know?
Delta informs investment decisions
Using the delta ratio can help options investors and traders make better, more informed decisions about their investments. Delta can help investors determine whether it is the best time to buy or sell options.
Could lead to better returns
Having more insight and performing more research before investing in options can help investors and traders realise better returns in the long term.
Can result in high transaction costs
If investors continuously buy and sell options based on delta to either maximize their returns or attempt to achieve a delta neutral position they may occur large transaction fees which could considerably eat into their returns.