Loading the player...

What is 'Delta'

Delta is the ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. For example, if a stock option has a delta value of 0.65, this means that if the underlying stock increases in price by $1, the option will rise by $0.65, all else equal.

BREAKING DOWN 'Delta'

Delta values can be positive or negative depending on the type of option. For example, the delta for a call option always ranges from 0 to 1, because as the underlying asset increases in price, call options increase in price. Put option deltas always range from -1 to 0 because as the underlying security increases, the value of put options decrease. For example, if a put option has a delta of -0.33, if the price of the underlying asset increases by $1, the price of the put option will decrease by $0.33. In practice, computational software aides fast calculations. Technically, the value of the option's delta is the first derivative of the value of option with respect to the underlying security's price. Delta is often used by investment professionals and traders for hedging strategies.

Delta Behavior Examples

Delta is an important statistic to calculate as it is one of the main reasons option prices move the way that they do. The behavior of call and put option delta is highly predictable and is very useful to portfolio managers, traders and individual investors.

Call option delta behavior depends on whether the option is "in-the-money," meaning the position is currently profitable, "at-the-money," meaning the option's strike price currently equals the underlying stock's price, or "out-of-the-money," meaning the option is not currently profitable. In-the-money call options get closer to 1 as expiration approaches. At-the-money call options typically have a delta of 0.5, and the delta of out-of-the-money call options approaches 0 as expiration approaches. The deeper in-the-money the call option, the closer the delta will be to 1, and the more the option will behave like the underlying asset.

Put option delta behaviors also depend on whether the option is "in-the-money," "at-the-money," or "out-of-the-money" and are the opposite of call options. In-the-money put options get closer to -1 as expiration approaches. At-the-money put options typically have a delta of -0.5, and the delta of out-of-the-money put options approaches 0 as expiration approaches. The deeper in-the-money the put option, the closer the delta will be to -1.

RELATED TERMS
  1. Delta Hedging

    An options strategy that aims to reduce (hedge) the risk associated ...
  2. Delta Neutral

    A portfolio consisting of positions with offsetting positive ...
  3. Delta Spread

    An options trading strategy where the trader initially establishes ...
  4. Greeks

    Dimensions of risk involved in taking a position in an option ...
  5. Charm

    The rate at which the delta of an option or warrant will change ...
  6. Delta-Gamma Hedging

    An options hedging strategy that combines a delta hedge and a ...
Related Articles
  1. Trading

    Options Trading Strategies: Understanding Position Delta

    Learn more about the position delta hedge ratio and how it can tell you the number of contracts needed to hedge a position in the underlying asset.
  2. Investing

    How Does Delta Hedging Work?

    Delta hedging is a derivative trading strategy that attempts to reduce -- or eliminate -- the risk caused by price changes in the underlying asset.
  3. Trading

    Using "The Greeks" To Understand Options

    These risk-exposure measurements help traders detect how sensitive a specific trade is to price, volatility and time decay.
  4. Trading

    Measuring Options With the Greeks

    Delta, gamma, theta and vega are “the Greeks,” and they provide a way to measure the sensitivity of an option’s price.
  5. Trading

    Getting To Know The "Greeks"

    Understanding price influences on options positions requires learning about delta, theta, vega and gamma.
  6. Trading

    The Forex Greeks And Strategies

    We look at the different kinds of Greeks and how they can improve your forex trading.
  7. Retirement

    Is Delta Stock Suitable for Your IRA or Roth IRA? (DAL)

    Learn about Delta Airlines and the factors that affect the company's performance. Discover if Delta stock makes an appropriate investment for IRA accounts.
  8. Trading

    The Ins And Outs Of Selling Options

    Selling options can seem intimidating but with these tips, you can enter the market with confidence.
  9. Trading

    The Anatomy of Options

    Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
  10. Investing

    Explaining Gamma

    Gamma is a measurement of how fast the delta of an option’s price changes after a 1-point movement in the underlying security.
RELATED FAQS
  1. Why does delta only range from 1 to -1?

    Learn what the option Greek delta is, what affects the value of delta for an option and why the delta of an option can only ... Read Answer >>
  2. How can you use delta to determine how to hedge options?

    Learn what delta is, how to use delta to hedge options and how to maintain a delta-neutral position by delta-hedging options ... Read Answer >>
  3. What does it mean to say that a straddle is "delta neutral?"

    Learn what the option Greek delta is and what makes a delta-neutral position, and see an example illustrating a delta-neutral ... Read Answer >>
  4. What are common delta hedging strategies?

    Learn about common delta hedging strategies, including how to make a position in options delta neutral by offsetting risk ... Read Answer >>
  5. What are the limitations of using delta to hedge options?

    Learn about the delta of an option, how to delta hedge an option position and the limitations of using delta to hedge an ... Read Answer >>
  6. What industries typically use delta hedging techniques?

    Learn what industries use delta hedging techniques for options trading, and understand how delta neutral trading strategies ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center