Options trading delta values
This means that the delta value of in the money calls tends to move towards 1 as expiration approaches or -1 for put options while the on out of the money options will usually move towards 0.
There are essentially two main ways that an options trader can use delta. It's important to remember, though, that this value is only an indication of how the price of an option is likely to change and not a guarantee of how it will change.
The primary use of delta is to give you an idea of how much money you will make if the underlying stock moves as you expect it to or how much you will lose if the underlying stock moves in the opposite direction. This can then help you determine which options give you the best value for money in terms of taking advantage of what you expect to happen. For example, you might believe that stock in Company X is going to increase in price by a certain amount over a specific period of time.
By studying the delta values of the relevant calls with different strike prices you can then try to work out how to maximize your potential returns, or minimize your potential losses. At the money contracts will be cheaper than in the money contracts, and out of the money contracts will be cheaper still. By comparing the price of those contracts with their delta values, you can work out how much you would expect to make if Company X does move as you expect it to.
It may be that you stand to make a better return on your investment with the cheaper out of the money contracts, or it may be that the in the money contracts will work out better for you. The second main use is based on probability. The delta value of an option can be used to determine the approximate probability of it expiring in the money.
The closer the delta value is to 0, the less chance it has of finishing in the money. Conversely, calls options with a delta value close to 1 and puts options with a value close to -1 have a very high chance of finishing in the money.
Although the calculations behind delta aren't specifically related to probability in this sense, it's still a reasonable way to gauge the rough likelihood of an option expiring in the money.
In turn, this can help you know which trades to make as you can weigh up the risks involved in a trade against the strength of your expectation for what will happen to the relevant underlying stock.
When creating spreads, it can be a good idea to calculate the total delta value of the spread. This is a simple calculation where you just add up the value of all your positions. For example, if you owned two calls that had a value of. Delta values can also be used to set targets for your trades, and to decide at what point you should close a trade and take your profits or cut your losses. Options Delta Options Delta is probably the single most important value of the Greeks to understand, because it indicates how sensitive an option is to changes in the price of the underlying security.
In Meet the Greeks we discussed how delta affects the value of individual options. Think of position delta this way: A single call contract with a delta of. But generally speaking, an option contract will represent shares of stock. So you need to multiply the delta by shares: Owning a single call contract with a delta of.
It works the same way with puts, but keep in mind that puts have a negative delta. So if you own a put contract with a delta of -. Say you own 10 contracts of XYZ calls, each with a delta of. To calculate position delta, multiply. This gives you a result of That means your call options are acting as a substitute for shares of the underlying stock. Much of the time your option strategies will be more complex than a few call options with the same strike price.
You might use multi-leg strategies, and you might even run different strategies on the same underlying stock at the same time. Each of those strategies might involve options with different strike prices and expiration dates. For example, you might wind up running an iron condor and a long calendar spread with calls simultaneously on the same underlying stock.
The deltas of some individual options in the complete option position will be positive and some will be negative. For instance, consider a long call spread with two legs.
Example 2 shows the details of an XYZ long call spread with a long strike and a short strike, both with the same expiration date. The delta of the strike call is. So to determine the total delta, we multiply. Now you simply add the deltas from each leg together to determine your position delta: Therefore, the total value of this position will behave like shares of stock XYZ.
Your net position delta for options on any underlying stock represents your current risk relative to a change in the stock price.