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.