What is Delta?

Delta is the theoretical estimate of how much an option’s value may change given a $1 move UP or DOWN in the underlying security. The Delta values range from -1 to +1, with 0 representing an option where the premium barely moves relative to price changes in the underlying stock.

For illustrative purposes only.

Delta is a positive value for long stocks Select to open or close help pop-up, long calls Select to open or close help pop-up and short puts Select to open or close help pop-up. On an individual basis, long stock, long calls and short puts are bullish strategies. Inversely, Delta is a negative value for short stock Select to open or close help pop-up, short calls Select to open or close help pop-up and long puts Select to open or close help pop-up. On an individual basis, short stock, short calls and long puts are bearish strategies. Delta is +1 for shares of long stock and -1 for shares of short stock. An option’s Delta ranges from -1 to +1. The closer an option’s Delta is to +1 or -1, the more strongly the option’s premium responds to a change in the underlying security.

How is Delta used?

Assess Directional Risk

Bullish strategies have a positive Delta and bearish strategies have a negative Delta. Stocks and each individual leg of an option strategy have their own Delta. The Delta of the contracts and securities can be combined to assess the directional risk of the strategy as a whole. Meaning — the net Deltas will reveal if a strategy or a portfolio is bullish or bearish.

For Example:

Long 100 XYZ equals +1 Delta (Long Stock, Bullish)

Short 1 XYZ call at -.30 Delta (Short Call, Bearish)

Net Delta = +.70 Delta

From a Delta perspective, this strategy is bullish, as demonstrated by a positive net Delta, and would benefit from upward movement of the underlying though to a lesser degree than the long stock position alone.

Assess Traction (Stock Sensitivity)

Long stocks have a Delta of +1 and short stocks have a Delta of -1. An option’s delta ranges from +1 to -1. The deeper an option moves in-the-money Select to open or close help pop-up, the closer an option’s Delta moves toward +1 or -1. An option with a Delta of +1 will move in tandem with the underlying security, it has now begun to act like the stock. Meaning, time value is no longer priced in, regardless of expiration. Essentially, a Delta closer to +1 or -1, means a greater change in the option price when the underlying moves. Therefore, by assessing Delta on an option contract individually or as a net figure from a strategy or portfolio perspective, the sensitivity to the underlying security can be assessed.

For illustrative purposes only.

Assess Probability of In-the-Money at Expiration

An increasing Delta is an indication that the option is becoming more sensitive to the underlying security and ultimately the premium is comprised of mostly intrinsic value Select to open or close help pop-up. For this reason, Delta can be used to assess the market-assigned probability of the option being in-the-money at expiration. Essentially, a Delta closer to +1 or -1 is an indication of greater intrinsic value which can be translated into a higher probability of being in-the-money at expiration — potentially because it already is in-the-money.

For Example:

In-the-money XYZ Call @ .60 Delta = 60% probability of being in-the-money at expiration

At-the-money XYZ Call @ .50 Delta = 50% probability of being in-the-money at expiration

Out-of-the-money XYZ Call @ .30 Delta = 30% probability of being in-the-money at expiration

What are other factors to consider?

Delta is not a constant value and changes as the stock price changes. This change in Delta is measured by another Greek, known as Gamma. Since Delta changes as the stock moves, it is important to remember that Delta will not accurately predict the exact change in the option’s premium, especially for larger changes in the stock’s price.