Delta

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DEFINITION of 'Delta'

The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the "hedge ratio."

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BREAKING DOWN 'Delta'

For example, with respect to call options, a delta of 0.7 means that for every $1 the underlying stock increases, the call option will increase by $0.70.

Put option deltas, on the other hand, will be negative, because as the underlying security increases, the value of the option will decrease. So a put option with a delta of -0.7 will decrease by $0.70 for every $1 the underlying increases in price.

As an in-the-money call option nears expiration, it will approach a delta of 1.00, and as an in-the-money put option nears expiration, it will approach a delta of -1.00.

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RELATED FAQS
  1. What are the differences between delta hedging and beta hedging?

    Hedging is used to reduce the risk of adverse price movements in an asset class by taking an offsetting position in a related ... Read Full Answer >>
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    In a bear call spread option strategy, a short call option is sold at a lower strike price, while a call is bought at a higher ... Read Full Answer >>
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    Delta hedging is a strategy used to mitigate the risk associated with the price move in the underlying asset of an option ... Read Full Answer >>
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    The delta of a derivative security tells you the relationship between the underlying security's price and the security's ... Read Full Answer >>
  5. Why does delta only range from 1 to -1?

    Delta measures the sensitivity of an option relative to the underlying asset. It measures the rate of change in the price ... Read Full Answer >>
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