SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Options Trading Greeks: Delta For Direction


The option's delta is the rate of change of the price of the option with respect to its underlying price. The delta of an option ranges in value from 0 to 1 for calls (0 to -1 for puts) and reflects the increase or decrease in the price of the option in response to a 1 point movement of the underlying asset price. Far Out-of-The-Money options have delta values close to 0 while Deep-In-The-Money options have deltas that are close to 1.

The Delta is one of the most important Options Greeks.

General

 

The delta of an option is the sensitivity of an option price relative to changes in the price of the underlying asset. It tells option traders how fast the price of the option will change as the underlying stock/future moves.

 

Option delta is usually displayed as a decimal value between -1 and +1. Some traders refer to the delta as a whole number between -100 and +100. Delta of +0.50 is the same as +50.

 

The following graph illustrates the behaviour of both call and put option deltas as they shift from being out-of-the-money (OTM) to at-the-money (ATM) and finally in-the-money (ITM). Note that calls and puts have opposite deltas - call options are positive and put options are negative.

 

Options Greeks: Delta For Direction

 

Call and Put Options

 

Whenever you are long a call option, your delta will always be a positive number between 0 and 1. When the underlying stock or futures contract increases in price, the value of your call option will also increase by the call options delta value. When the underlying market price decreases the value of your call option will also decrease by the amount of the delta. When the call option is deep in-the-money and has a delta of 1, then the call will move point for point in the same direction as movements in the underlying asset.

 

Put options have negative deltas, which will range between -1 and 0. When the underlying market price increases the value of your put option will decreases by the amount of the delta value. When the price of the underlying asset decreases, the value of the put option will increase by the amount of the delta value. When the underlying price rallies, the price of the option will decrease by delta amount and the put delta will therefore increase (move from a negative to zero) as the option moves further out-of-the-money. When the put option is deep in-the-money and has a delta of -1, then the put will move point for point in the same direction as movements in the underlying asset.

 

If you have a call and a put option, both for the same underlying, with the same strike price, and the same time to expiration, the sum of absolute values of their deltas is 1.00. For example, you can have an out of the money call with a delta of 0.36 and an in the money put with a delta of -0.64.

 

Delta Sensitivity

 

As a general rule, in-the-money options will move more than out-of-the-money options, and short-term options will react more than longer-term options to the same price change in the stock.

 

As expiration nears, the delta for in-the-money calls will approach 1, reflecting a one-to-one reaction to price changes in the stock. Delta for out-of the-money calls will approach 0 and won’t react at all to price changes in the stock. That’s because if they are held until expiration, calls will either be exercised and “become stock” or they will expire worthless and become nothing at all.

 

As expiration approaches, the delta for in-the-money puts will approach -1 and delta for out-of-the-money puts will approach 0. That’s because if puts are held until expiration, the owner will either exercise the options and sell stock or the put will expire worthless.

 

As an option gets further in-the-money, the probability it will be in-the-money at expiration increases as well. So the option’s delta will increase. As an option gets further out-of-the-money, the probability it will be in-the-money at expiration decreases. So the option’s delta will decrease.

 

It is important to remember that Delta is constantly changing during market hours and will typically not accurately predict the exact change in an option’s premium.

 

Delta as Probability

 

Delta can be viewed as a percentage probability an option will wind up in-the-money at expiration. Therefore, an at-the-money option would have a .50 Delta or 50% chance of being in-the-money at expiration. Deep-in-the-money options will have a much larger Delta or much higher probability of expiring in-the-money.

 

Looking at the Delta of a far-out-of-the-money option is a good indication of its likelihood of having value at expiration. An option with less than a .10 Delta (or less than 10% probability of being in-the-money) is not viewed as very likely to be in-the-money at any point and will need a strong move from the underlying to have value at expiration.

 

As mentioned, the sum of absolute values of delta of a call and a put with the same strike is one. This is in line with the probability idea. When you have a call and a put on the same underlying and with the same strike price, you can be sure that one of them will expire in the money and the other will expire out of the money (unless, of course, the underlying stock ends up exactly equal to the strike price and both options expire exactly at the money). Therefore, the sum of the probabilities should be 100% (and the sum of the absolute values of deltas should be one).

 

Just for clarification, delta and probability of expiring in the money are not the same thing. Delta is usually a close enough approximation to the probability.

 

Example

 

If the delta on a particular call option is .55, then, all other things being equal, the price of the option will rise $0.55 for every $1 rise in the price of the underlying security. The opposite effect is also seen as for every $1 decline in the price of the underlying the option will lose $0.55.

 

If the delta on a particular put option is -.45, then, all other things being equal, the price of the option will rise $0.45 for every $1 fall in the price of the underlying security. As with call options the obverse scenario is also true.

 

List of delta positive strategies

  • Long Call
  • Short Put
  • Call Debit Spread
  • Put Credit Spread
  • Covered Call Write


List of delta negative strategies

  • Long Put
  • Short Call
  • Put Debit Spread
  • Call Credit Spread
  • Covered Put Write


List of delta neutral strategies

  • Iron Condor
  • Butterfly
  • Short Straddle
  • Short Strangle
  • Long Straddle
  • Long Strangle
  • Long Calendar Spread


Summary

  • Positions with positive delta increase in value if the underlying goes up
  • Positions with negative delta increase in value if the underlying goes down
  • An option contract with a delta of 0.50 is theoretically equivalent to holding 50 shares of stock
  • 100 shares of stock is theoretically equivalent to an option contract with a 1.00 delta


Watch the video:

 

 

 

Related articles:


Want to learn how to put the Options Greeks to work for you?


Start Your Free Trial

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Using ORATS Wheel To Test Entries and Exits

    My favorite option strategy backtester is ORATS Wheel, which includes a free trial for those interested. In the Steady Momentum PutWrite Strategy (SMPW), we sell out of the money puts on global equity indexes and ETF’s while holding our collateral in short and intermediate term fixed income ETF’s.

    By Jesse,

    • 0 comments
    • 37 views
  • Estimating Delta for Calls or Puts

    Options trading relies on many estimates of value and volatility. Among these, the most useful estimate is Delta. Even knowledgeable options traders might not fully understand the “Greeks” and how they operate, especially with one another. They are directly related and are useful in making comparisons of market risk and volatility.

    By Michael C. Thomsett,

    • 0 comments
    • 200 views
  • Are Covered Calls a ‘Sure Thing?’

    Most covered call writers enjoy the regularity and reliability of the position. In the majority of cases, the covered call will be profitable, even when underlying shares are called away. This assumes that the strike is higher than the basis in the underlying, and that the call writer understands the real limitations to the strategy.

    By Michael C. Thomsett,

    • 0 comments
    • 536 views
  • Lessons from Bill Ackman's comeback

    Bill Ackman is an American investor, hedge fund manager and philanthropist. He is the founder and CEO of Pershing Square Capital Management, a hedge fund management company. Ackman is considered by some to be a contrarian investor but considers himself an activist investor.

    By Kim,

    • 1 comment
    • 1,682 views
  • Steady Futures 2019 Performance Analysis

    Steady Futures began trading the 50K portfolio in July 2019. It produced a 8.5% return during its 6 months of performance (18.0% annualized). We had three goals when we developed this system. First, we wanted a robust system that benefits from turmoil in the markets.

    By RapperT,

    • 0 comments
    • 357 views
  • SteadyOptions 2019 - Year In Review

    2019 marks our 8th year as a public service. It was a good year overall. We closed 151 winners out of 232 trades. Our model portfolio produced 41.7% compounded gain on the whole account based on 10% allocation per trade. We had only two losing months in 2019. 

    By Kim,

    • 0 comments
    • 536 views
  • Momentum 2019 Performance Analysis

    Steady Momentum had an excellent first year of publication, producing significant gains in both of the published strategies. The most popular strategy writes (sells) out of the money puts on equity indexes and ETF’s, and returned 19.1% for the year, beating our benchmark by approximately 5.5%.

    By Jesse,

    • 1 comment
    • 614 views
  • SteadyOptions 2019 Performance Analysis

    Steady Options model portfolio produced 41.7% gain in 2019. This is a very good return by any standards, but well below our long term returns. In the name of full transparency and our continuous learning, we are providing a full analysis of the 2019 numbers.

    By Kim,

    • 0 comments
    • 1,541 views
  • Anchor 2019 Performance Analysis

    Steady Options now has a full year of trading the Leveraged Anchor Account under its belt. (Technically since today is December 30, the values used herein are one day off.) To say things went as designed is an understatement - the strategy outperformed the S&P 500 in 2019 by 7.2% while being hedged.

    By cwelsh,

    • 1 comment
    • 770 views
  • A Reliable Method for Picking the Underlying

    A lot of emphasis is placed on selection of one strategy over another. Are you conservative or a speculator? Are you trying to make fast money or hedging equity positions? In fact, this is a primary concern among traders. The strategy should match the risk profile, of course. But there is much more to how and why you trade options.

    By Michael C. Thomsett,

    • 0 comments
    • 574 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs Expertido