Delta (Options)

Definition

The term delta refers to the rate of change in the theoretical premium paid or received for an option for one unit change in the price of the underlying asset.  Delta values for call options will always be positive, while those for a put will always be negative.

Explanation

An option's delta allows the investor to understand how a change in the price of the underlying asset affects the price of the option.  An option's delta will vary over the duration of a contract and its behavior and value will be very different for calls and puts.

Call Delta Values

The delta value for a call option will range from zero to one.  As the price of the underlying asset increases, the price of a call option will increase.  For example, if the delta for a call option is 0.50, and the price of the underlying asset increases by $1.00, then the value of the option will rise by $0.50.

Several generalizations can also be made with respect to call delta values:

  • The delta for in-the-money call options will approach 1.00 the deeper the call is in-the-money.
  • The delta for an in-the-money call option will approach 1.00 as the option approaches its expiration date.
  • At-the-money-call options will have a delta around 0.50.

Put Delta Values

The delta value for a put option will range from zero to negative one.  As the price of the underlying asset increases, the price of a put option will decrease.  For example, if the delta for a put option is -0.50, and the price of the underlying asset increases by $1.00, then the value of the option will decrease by $0.50.

Several generalizations can also be made with respect to put delta values:

  • The delta for in-the-money put options will approach -1.00 the deeper the put is in-the-money.
  • The delta for an in-the-money put option will approach -1.00 as the option approaches its expiration date.
  • At-the-money-call options will have a delta around -0.50.

Related Terms

delivery, time decay, debit spread, credit spread