The Delta Of An Option
Just as an option has a price and a value, it has other characteristics that can be described numerically. One of the most important is the delta, one of the so-called “greeks.”
The greeks tell you how sensitive the value of an option is to changes in other quantities related to the option. The delta of an option is a number telling you how much the value of the option changes when the underlying rises by $1.
If the underlying is a stock and the option is a call, the call will rise in value when the stock rises in price, but its rise will be less than the stock’s. Deltas are often quoted as decimals. A delta of .7 means that the value of the option will increase by $0.70 if the stock price rises by $1.00.
If the option is a put, the put will decrease in value when the stock price rises. The delta of a put is therefore negative. A delta of -0.3 means the put value will “increase” by -$0.30 when the stock price rises by $1.00–which means the put value will decrease by $0.30.
At-the-money options, calls or puts, have deltas of about 0.5–at-the-money calls have deltas about 0.5 and at-the-money puts have deltas about -0.5. Deep-in-the-money calls have deltas close to (but less than) 1.0 and deep in-the-money puts have deltas close to -1.0.
Deep out-of-the-money calls have positive deltas just a little greater than 0.0 and deep out-of-the-money puts have negative deltas just a little less than 0.0.
The delta of an option also tells you the number of shares of the underlying that behave in the market like the option. For instance, a slightly in-the-money call with a delta of 0.6 will behave like 0.6 shares of the stock.
Deltas are sometime quoted as numbers between -100 and +100, because stock options are options on 100 shares of stock. So the above call actually behaves like 60 shares of stock when you consider its value in the market.
We will use deltas on this site to describe certain spreads and other characteristics that relate to an option’s price behavior. The above descriptions should give you an intuitive understanding sufficient for most discussions.