Option

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Delta

Delta is without any doubt the Greek that is most widely used. There is nothing unusual in that, since the delta value tells how sensitive the option is for price movements in the underlying stock – the foundation of the option’s value. An option’s delta simply tells how much the option’s value changes if the stock price goes up 1 unit. For call options, delta is always a figure between 0 and 1. A call option with a delta value of 0.6 thereby rises with 0.60 units if the stock goes up 1 unit.

For put options the opposite applies: they have always a value between 0 and -1. The minus sign is explained by the fact that put options always lose value when the value of underlying rises. Thereby it is quite easy to imagine that an option with a delta value of exactly 0 is not very interesting for an investor. It will not be affected at all when the stock price moves. On the other, pricing fluctuations happen a lot with options that have a delta of 1 (-1). They will rise or decline just as much as the underlying stock.

This gives us a first tool to analyze the portfolio. A delta value of 0 quite simply represents an obvious minus option with little time to maturity – or in other words, something very unlikely needs to happen for a call option that is traded far below the strike price when there is one day left to maturity should reach a profitable level. A delta of one is on the other hand associated with obvious plus options, which real values are high at the same time as the sensitivity for the underlying stock is high.