What does the Greek Letter Delta mean – Options Trading

In terms of options, the Greek letter, Delta, is a theoretical estimate of how much an option’s price may change with a $1 change in the underlying security’s price.

This article will explain what Delta is, and how it works in real-world examples. Understanding Delta is a tool an investor can use to advance his options trading skills.

The Delta value can be either positive or negative depending on the type of option. For call options, it always ranges from 0 to 1. This is because as the underlying security increases in price, the call option increases in price. For put options, it always ranges from -1 to 0. This is because as the underlying security increases in price, the put option’s price decreases.

For example, if a call option has a Delta of .25, and the underlying stock increases in price by $1 per share, then the option price will increase by $0.25 per share. If a put option has a Delta that is -.25, and the underlying stock increases in price by $1 per share, then the option price will decrease by $0.25 per share.

Another thing to note about Delta is that its behavior depends on whether an option is “in-the-money,” “at-the-money,” or “out-of-the-money.”

When dealing with a call option, the more “in-the-money” the option is as it approaches its expiration, the closer the Delta value is to 1. “At-the-money” call options typically have a Delta value of .50. “Out-of-the-money” call options that approach expiration have a Delta value that gets closer to 0.

When dealing with a put option, the more “in-the-money” the option is as it approaches its expiration, the closer the Delta value is to -1. “At-the-money” put options typically have a Delta value of -.50. “Out-of-the-money” put options that approach expiration have a Delta value that gets closer to 0.

Now, let’s look at a couple of real-world scenarios of the Delta being used in call and put options.

1. Assume FedEx stock (NYSE: FDX) is priced at $230. The FDX 225 call option that expires in a month has a .75 Delta and is priced at $13. If the FDX stock rises to $231, then the call option price would rise to $13.75. With a $1 increase in the stock, the call option increased by $0.75 since it had a Delta of .75.
2. Assume FedEx stock is priced at $230. The FDX 225 call option has a .75 Delta and is priced at $13. This time, the FDX stock falls to $229. This causes the call option price to fall to $12.25. With a $1 decrease in the stock, the call option decreased by $0.75.
3. Assume FedEx stock is priced at $230. This time, the FDX 235 put option has a -.60 Delta and is priced at $5. If the FDX stock rises to $231, then the put option price would fall to $4.40. With a $1 increase in the stock, the put option decreased by $0.60 since it had a Delta of -.60.
4. Assume FedEx stock is priced at $230. The FDX 235 put option has a -.60 Delta and is priced at $5. The FDX stock falls to $229. This causes the put option price to increase to $5.60. With a $1 decrease in the stock, the put option increased by $0.60.

Using Delta can help investors determine how much the price of an option will change depending on how much the underlying security’s price changes. After looking at Delta in action in these scenarios, one should feel prepared to understand Delta in his own options trading scenarios.