The 6-Week Options Trading Kickstarter: Meet the Greeks!
Steve Smith breaks down delta, theta, vega, gamma, and rho.
Delta is the expected change in an option's price for every $1 move in the price of the underlying stock. Delta can range from 0.00 to 1.00, with calls being expressed as a positive number and puts as a negative number. The rule of thumb is that an at-the-money option has a delta of 0.50.
It is very important to understand that delta is not fixed. It is a function of the underlying stock price and the time remaining until expiration. As an option moves further into-the-money and time decays, the delta increases at an accelerated rate. Conversely, as an option moves further out-of-the-money and has more time remaining, delta decreases at a slower rate.
For example, if shares of Apple (NASDAQ:AAPL) moved from $615 to $625, you could expect the at-the-money $610 call to increase by about $6 per contract, and the at-the-money $615 put to decline by about $4 per contract.
On the call side, a delta of 0.50 would suggest a $5 move, but since delta is on a slope, it increases for call on the way up, pushing the move up to $6. Conversely, it decreases on the way down for puts, so the put only declines by $4.
This is a valuable feature of options in that your profits will accelerate as price moves in your direction and losses will decelerate relative to the stock as price moves against you – so profits can pile up faster than losses.
Another important reason to understand delta is that it will help you gear expectations and determine how many contracts might be needed to hedge a stock position.
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