Delta (∆) is the rate of change of an option's value relative to the change in the underlying stock price. Delta can be defined in many ways:
01.The rate of change of an option's value relative to the underlying stock price.
02. The equivalent of the underlying shares.
03. The likelihood of the option expiring ITM.
This lesson will cover Delta long option positions. The Delta for long positions is positive for long call options and negative for long put positions. The reason for this is that a long call is a bullish position and a long put a bearish position.
If the Google December 580 call option has a Delta of .65, the investor can theoretically expect to profit when the underlying stock moves up in value and incur losses when the underlying stock moves down in value.
Long Call = Bullish Position
Google December 580 call option premium is $9.00 and the Delta is .65:
If Google stock moves UP $1 in value, the call option contract will
increase in value to $9.65
(positive for long Delta positions)
If Google stock moves DOWN $1 in value, the call option contract will
decrease in value to $8.35
(negative for long Delta positions)
If the Google December 500 put option has a Delta of -.51, the investor can theoretically expect to profit when the underlying stock moves down in value and incur losses when the underlying stock moves up in value.
Long Put = Bearish Position
Google December 500 put option premium is $6.00 and the Delta is -.51:
If Google stock moves UP $1 in value, the put option contract will
decrease in value to $5.49
(negative for long Delta positions)
If Google stock moves DOWN $1 in value, the put option contract will
increase in value to $6.51
(positive for long Delta positions)
(Reminder: 1 option contract represents 100 shares of the underlying stock. Therefore, in the first example the value of the option contract would increase or decrease by $65 when the underlying stock increases or decreases $1. In the second example, the value of the option contract would increase or decrease by $51 when the underlying stock increases or decreases $1.)
When Delta reaches the level of 1.00, an investor will experience 1 to 1 movement in terms of underlying stock price and option premium movement ($1 change in the underlying will change option premium by $100). Therefore, if an investor is long 2 call options that have a Delta of 1.00 each, the option premium will fluctuate $200 for each $1 move in the underlying stock.
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