Another Use For Delta
We have noted here that deep ITM calls have delta almost equal to 1.0 and, in connection with the covered write discussion, that deep ITM calls have an almost 100% chance of expiring in-the-money. Likewise, we know that ATM calls have a delta of approximately 1/2, and that the chance they will expire with a positive value is about 50%; and that deep OOTM calls have a very low chance of expiring in-the-money and they also have a delta that is near to zero.
These observations might lead you to suspect that the chance a call will expire in-the-money– i.e., be worth something on expiration day–is equal to its delta. In fact, this is not precisely the case, but it is close enough so that you won’t be far wrong if you use it as a general, rough rule: the chance that a stock will be above a given exercise price is about equal to the delta of a call option with that exercise price.
For example, with ELN at $31 1/4, the ELN Aug. 30 calls on Wednesday’s (June 23) Most Overpriced list have a delta of 64 (meaning actually .64, but meaning also that the calls behaves like 64 shares of the underlying stock). The chance that they will expire in-the-money–the chance that ELN will be above $30 at expiration–is about 64%. The IBM Aug 135 calls on Wednesday’s Most Overpriced list, with IBM selling at $123 3/8, have a delta of 32. The chance that they will expire in-the-money is about 32%, and so on.
What about puts? Put deltas are negative, because a put value decreases when the price of the underlying increases. And there is no such thing as a negative chance. The rule for puts is just what you would expect: The chance that a put will finish in-the-money is about equal to its delta, ignoring the minus sign.
For example, the ELN July 32.5 puts on Wednesday’s Most Overpriced list have a delta of -54. The chance they will expire in-the-money is about 54%. And the IBM Aug 115 puts on Wednesday’s Most Overpriced list have a delta of -28. The chance that IBM will be below $115 at expiration and these puts will expire in-the-money is roughly 28%, and so on.
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