Loading the player...

What is 'Delta'

The delta is a ratio comparing the change in the price of an asset, usually a marketable security, to the corresponding change in the price of its 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 per share, the option on it will rise by $0.65 per share, all else being equal.


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. Technically, the value of the option's delta is the first derivative of the value of the option with respect to the underlying security's price.

Delta is often used in hedging strategies, and is also referred to as a hedge ratio.

Examples of Delta

Let's assume there is a publicly traded corporation called BigCorp. Shares of its stock are bought and sold on a stock exchange, and there are put options and call options traded for those shares. The delta for the call option on BigCorp shares is .35.  That means that a $1 change in the price of BigCorp stock generates a $.35 change in the price of BigCorp call options. Therefore, if BigCorp’s shares trade at $20, and the call option trades at $2, a change in the price of BigCorp’s shares to $21 means the call option will increase to a price of $2.35. 

Put options work in the opposite way. If the put option on BigCorp shares has a delta of -$.65 then a $1 increase in BigCorp shares' price generates a $.65 decrease in the price of BigCorp put options. Therefore, if BigCorp’s shares trade at $20, and the put option trades at $2, and then BigCorp’s shares increase to $21, the put option will decrease to a price of $1.35.

How Delta Dictates Behavior

Delta is an important calculation (done by computer software), as it is one of the main reasons option prices move the way that they do, and it's an indicator of how to invest. The behavior of call and put option delta is highly predictable and is very useful to portfolio managers, traders, hedge fund managers and individual investors.

Call option delta behavior depends on whether the option is "in-the-money" (currently profitable), "at-the-money" (its strike price currently equals the underlying stock's price) or "out-of-the-money" (not currently profitable). In-the-money call options get closer to 1 as their 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 nears. 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.

Delta Spread

Delta spread is an options trading strategy in which the trader initially establishes a delta neutral position by simultaneously buying and selling options in proportion to the neutral ratio (that is, the positive and negative deltas offset each other, so that so that the overall delta of the assets in question totals zero). Using a delta spread, a trader usually expects to make a small profit if the underlying security does not change widely in price. However, larger gains or losses are possible if the stock moves significantly in either direction.

The most common delta spread is a calendar spread. The calendar spread involves constructing a delta neutral position using options with different expiration dates. In the simplest example, a trader will simultaneously sell near-month call options and buy call options with a later expiration in proportion to their neutral ratio. Since the position is delta neutral, the trader should not experience gains or losses from small price moves in the underlying security. Rather, the trader expects the price to remain unchanged, and as the near-month calls lose time value and expire, the trader can sell the call options with longer expiration dates and ideally net a profit.

  1. Delta Hedging

    Delta hedging seeks to lessen risk by shorting a stock underlying ...
  2. Greeks

    Dimensions of risk involved in taking a position in an option ...
  3. Put On A Call

    One of the four types of compound options, this is a "put" option ...
  4. In The Money

    1. For a call option, when the option's strike price is below ...
  5. Delta-Gamma Hedging

    Delta-gamma hedging is an options strategy that combines delta ...
  6. Currency Option

    A contract that grants the holder the right, but not the obligation, ...
Related Articles
  1. Insights

    Delta Posts Fourth-Quarter and 2016 Earnings (DAL)

    Delta has released its earnings for the fourth-quarter and for 2016. The press release also includes guidance for the March 2017 quarter.
  2. Insights

    Delta Releases Operating Expense Figures for Q4 and 2016 (DAL)

    Delta’s operating expenses for Q4 and 2016 are down from the previous year despite increased labor costs.
  3. Investing

    Delta Air Lines Announces Another Big Buyback (DAL)

    Two years ago, Delta Air Lines (NYSE: DAL) marked the beginning of a new era in the airline industry when it began paying a $0.06 quarterly dividend and announced a $500 million share buyback ...
  4. Insights

    Delta Releases Q4 & 2016 Revenue Figures (DAL)

    Delta’s revenue figures for Q4 and 2016 are down from the previous year, mostly due to declines in passenger revenue.
  5. Investing

    Delta's 3 Key Financial Ratios (DAL)

    Learn why a smaller sales growth rate is actually good for an airline company such as Delta to achieve a better operating margin and higher stock valuation.
  6. Insights

    Delta to Revamp Business Class; Expand Codeshare With Korean Air (DAL)

    Delta is improving its customer offerings to increase revenue.
  1. How can I calculate the delta adjusted notional value?

    Learn how to calculate the delta adjusted notional value of an options contract and why gross notional value cannot be used, ... Read Answer >>
  2. What is index option trading and how does it work?

    Learn about stock index options, including differences between single stock options and index options, and understand different ... Read Answer >>
  3. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
  4. When is a put option considered to be "in the money"?

    Learn about put options, what they are, how these financial derivatives operate and when put options are considered to be ... Read Answer >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center