Delta - Δ

The Basics

• The option delta is the rate of change of the option premium compared with the rate of change of the underlying asset price.

  In other words delta measures the speed of the option position compared with that of the underlying asset.

  Delta =

  rate of change in option price rate of change in underlying asset price

• When the asset price is at the money (ATM) the delta value will be around 0.5 (as a general rule).  This means that for every $1.00 the stock moves, the option will move at a speed of around half of that.  Obviously as the asset price deviates away from the ATM point, then the delta will change too, away from 0.5.

  ATM = +/- 50 deltas, ie moves at half the speed of the underlying asset

  Remember that 1 share has a delta of +/- 1, and 1 option contract represents 100 shares, therefore 1 ATM option will have a delta of +/- 50.

  You can think of delta as being the probability of the option expiring in the money.  So a delta of +/- 50 is saying the option has a 50/50 chance of expiring in the money.

Example

If you buy 100 shares of AMZN (+100 deltas), you would need to buy 2 ATM puts (-50 deltas each) for a delta neutral position.