TSC Options Forum: Facts About Delta

Hello Steve. How do I find out or calculate the delta of a call?

I've received a lot of questions on delta, ranging from "Does volatility effect an option's delta?" to "Can a delta be negative?" and "I'm a small investor who usually just buys LEAPs, so why do I need to even know an option's delta?"

Of all the "greeks" that are used to define the characteristics of an option, delta is probably the most basic and necessary. Since an option's delta is so fundamental, I want to address this in two parts. This week I'll focus mainly on what delta is and how you can determine a specific option's delta. Next week we'll see how it can be applied to trading strategies and help you determine hedging requirements.

Delta measures the expected change in an option's value for a unit change in the price of the underlying security. Options have deltas that range from 0 to 1.00. For practical purposes call options have positive deltas, while put options' deltas are negative. For example, if a stock moves from $50 up to $51, and the at-the-money options have a 0.50 delta, you can expect the value of the $50 call to increase 50 cents and the value of the $50 put to decline by 50 cents.

Knowing how an option's value will change relative to the underlying price is crucial when making investment decisions, not only for speculative single strike positions, but even more so when used for hedging purposes or in multistrike combinations.

An option's delta is a function of four of the five variables that go into valuing an option's price using the Black-Scholes pricing method. Implied volatility has virtually no measurable impact on an option's delta.