Learn Option Basics Part 8

What Is Delta?

Delta is the ratio that compares the change in the price of an asset, usually marketable securities, to the corresponding change in the price of its derivative. For example, if a stock option has a delta value of 0.65, this means that if the underlying stock increases in price by $1 per share, the option on it will rise by $0.65 per share, all else being equal.

KEY TAKEAWAYS

• Delta expresses the amount of price change a derivative will see based on the price of the underlying security (e.g., stock).
• Delta can be positive or negative, being between 0 and 1 for a call option and negative 1 to 0 for a put option.
• Delta spread is an options trading strategy in which the trader initially establishes a delta neutral position by simultaneously buying and selling options in proportion to the neutral ratio.
• The most common tool for implementing a delta spread strategy is a calendar spread, which involves constructing a delta neutral position using options with different expiration dates.

Understanding Delta

Delta values can be positive or negative depending on the type of option. For example, the delta for a call option always ranges from 0 to 1 because as the underlying asset increases in price, call options increase in price. Put option deltas always range from -1 to 0 because as the underlying security increases, the value of put options decrease.