Delta
Firstly, let us understand ‘Delta.’
The Delta measures how an options value changes with respect to the change in the underlying. Means, the Delta of an option helps us answer that –
By how many points will the option premium change for every 1-point change in the underlying?
Delta captures the effect of the directional movement of the market or underlying on the Option’s premium.
Delta value ranges from 0 to 1 in case of call options
Delta value ranges from 0 to -1 in case of Put options
Why is delta negative for a put option and positive for a call option?
We have discussed this earlier, that with one unit increase in spot price, call premiums increase and put premium decrease. If the call premium increases with spot price increase, the delta of call options has to be positive and vice versa.
Example:
Consider Nifty is at 17288
Option Strike = 17250 Call Option
Premium at which it trades is = 133
And Delta of the option = + 0.55
Now say Nifty is expected to reach 17310
What will be the option premium value then? We know the Delta of the option is 0.55. We are expecting the underlying to change by 22 points (17310 – 17288), hence the premium is supposed to increase by
= 22*0.55
= 12.1
Therefore, the new option premium is expected to trade around 145.1 (133+12.1)
A delta of 0.55 indicates that for every 1-point change in the underlying, the premium is likely to change by 0.55 units.
The delta helps us evaluate the premium value based on the directional move in the underlying. And this is extremely useful information to have while trading options.
- Call Options have Positive Delta
- Put Options have Negative Delta
- OTM options have a delta value between 0 and 0.5, ATM option has a delta of 0.5, and ITM option has a delta between 0.5 and 1.
We can tabulate this to give us a better understanding:
