Options Delta

Options Delta Explained

10 min read

Options delta is one of the most important factors in an options contract. It is a member of the Greeks. Delta measures the rate of change in an options price per $1 move. For example, if an option contract has a delta of $0.35 and the price of the stock rises by $1, then the options contract would increase by $0.35. If the stock price decreases by $1, it would lose $0.35. 

There are many moving parts options. As a result, options trading is seen as more risky than trading shares. It’s important to remember that three other Greeks also worked together and affected one another.

Time decay is one of the most important aspects of options trading. Options have expiration dates. As a result, they’re wasting assets because their value declines over time.

Option delta is the most commonly used aspect of the Greeks because it’s the easiest to understand. It measures the rate of change in an option price. Specifically, the delta of a stock option tells us how much an option price would increase when the stock moves by $1.  

O.D. is part of what affects an option’s profit and loss. Delta makes up part of the Greeks in options trading. The Greeks are a part of the many moving parts that make up options. Options trading techniques give you the right but not the obligation to buy (call) or sell (put) a stock at a specified price (strike). One option contract controls 100 shares. In essence, it’s less expensive to trade options. Hence the appeal.

Options Delta Moving Parts

The value of the options delta is swayed by the time remaining until the expiration date and the strike price relative to the stock’s current market price.

For example, we’re interested in purchasing an NVDA call that expires in 3 months. The stock is currently trading at $250. Let’s say we will buy an in-the-money contract with a $235 strike price.

The delta for that strike is 0.69. The price will rise by $0.69 for every $1 that NVDA moves from now until expiration. However, if you want to purchase an out-of-the-money contract, then the delta is less. For example, if you believe that NVDA will hit $260 in three months, then the delta of that option is 0.46. As a result, it’ll only go up $0.46 for every dollar it moves. 

Options Delta Example

Options Delta

Options Price vs Stock Price

One way to think of O.D. is to liken it to mountain biking. The tires represent the delta, and the pedals represent the stock’s price. Make sure to learn how to sell options.

A low delta is like riding your street bike up and down a mountain. You won’t get a lot of traction trying to accelerate to climb up the side of the mountain. You may even ruin your tires doing that.

A high delta option is like using the correct bike. You can get a lot of traction going up and down the mountain. Since the tires are made for the mountain, going down is much easier.

When a delta’s value is closer to 1.0 or -1.0, you’re provided the highest level of traction, depending on whether you’re bullish or bearish. As a result, your price moves more.

Where you buy your option affects delta, i.e., in or out of the money. If you’re looking for the greatest traction, choose an option with a high delta. It’s important to remember that these options are usually more expensive because they tend to expire in the money.

This could be considered a great day trading strategy, especially on a stock that makes solid daily moves. Give yourself a lot of time value and a high delta. You’re more apt to make money that way.

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Being In the Money

One of the most common uses for O.D. is determining the likelihood of an option being in the money when it expires. For example, if an out-of-the-money delta of an option is 0.15, then it has a 15% chance of expiring in the money.

However, if you’re looking at a deep-in-the-money options contract with a delta of 0.92, then you have a 92% chance of your option expiring in the money.

The higher the delta, the higher the risk and reward. The lower the delta, the lower the risk, although you can still have a high reward. It’s all about how much time you give yourself.

80% of options expire worthless because they tend to be out of the money. Out-of-the-money options are cheaper than being in the money. However, being in the money gives you a cushion. 

Benefits of High Delta Options

A high delta for options can benefit certain trading strategies. Trading strategies that benefit from a high delta include:

1. Directional Strategies

If a trader anticipates a significant change in the price of an asset, they may use high delta options like deep in-the-money calls or puts as part of their directional strategy. These strategies aim to profit from the price movement of the underlying security and benefit from the leverage provided by options with high deltas.

2. Gamma Scalping

Gamma scalping is an options trading strategy designed to profit from small price movements in the underlying asset. Traders using this strategy buy options with high deltas and sell options with low deltas. As the price of the underlying security moves, the trader adjusts their position by buying or selling more options to maintain a neutral delta position. This strategy takes advantage of the relationship between gamma and delta, as the high delta options generate larger profits for small price movements.

3. Delta Hedging

Traders use a strategy called Delta Hedging to manage risk. This strategy helps to reduce or neutralize the impact of changes in the market on their positions. It involves offsetting positions in options or the underlying asset to create a delta-neutral portfolio. 

When the portfolio’s delta is zero, the trader eliminates the risk of price movements in the underlying asset. Traders may use options with high deltas to increase the effectiveness of their delta hedging strategy.

What Does High Delta Mean?

A high delta implies that the option’s price will move relatively closely with the underlying asset’s price movements. When an option has a delta of $0.80, it means that if the underlying asset’s price goes up by $1, the option’s price is expected to go up by $0.80. Similarly, if the underlying asset’s price goes down by $1, the option’s price is expected to go down by $0.80.

Traders who want to replicate the price movement of an underlying asset can benefit from having a high delta on their options. By holding options with high delta values, traders can benefit from a significant portion of the price changes in the underlying asset. This allows them to make more money. Hence, it’s useful for traders wanting to profit from directional moves in the market or for hedging purposes.

However, it’s important to note that high delta options are generally associated with in-the-money options (ITM). ITM options have higher premiums than out-of-the-money options since they possess intrinsic value. This means the upfront cost to purchase options with high delta values is usually higher.

In summary, high delta options can be valuable for traders who want their option’s price to mimic the underlying asset’s price movements closely. They provide the potential for larger gains (and losses) compared to options with lower delta values. Nevertheless, high delta options trading really depends on your strategy, risk tolerance, and market conditions.

Delta 0.5 At the Money

As we mentioned in our At The Money blog post, when an option is “at the money,” the option strike price equals the current market price of the underlying security. In this situation, the option has no intrinsic value because it is neither in or out of the money.

For at-the-money options, the delta is typically around 0.5 (positive for call options and negative for put options). A delta of 0.5 means that the option is 50% likely to finish in the money at expiration. In other words, the option has a 50% chance of moving in the same direction as the underlying asset’s price movement.

Key Takeaways

  • The delta of a stock option tells us how much an option price would increase when the stock moves by $1. 
  • O.D. values range from 0 to 1.0 for call options and 0 to -1.0 for put options.
  • High O.D. generate larger profits for small price movements.
  • High delta options are generally associated with in-the-money options and are typically expensive.
  • A delta of 1.0 (or -1.0 for puts) suggests that the option’s price will follow the underlying asset’s price movements.
  •  A delta being 0.5 at the money means that the option has a 50% probability of finishing in the money at expiration.
  • A delta close to 0 indicates that the option’s price is unlikely to change significantly with changes in the underlying asset’s price.

Final Thoughts: Options Delta

You can use delta to determine direction and the risk associated with it. Positive deltas are considered long, whereas negative deltas are considered short. You can decide if you’re long vs short.

Neutral deltas are neutral, meaning the market is probably trading sideways. There are options strategies, iron condors, that profit in a sideways market.

In other words, you want the delta to be positive if you’re bullish and negative if you’re bearish on a play.

O.D. determines how an option’s price will react to stock price changes. This can be useful in finding the probability of a stock expiring in the money. Since 80% of options expire worthless, this can be a great tool to see which strike price would benefit the most when a stock moves. 

If you need more help, take our options trading course.

Frequently Asked Questions

Options delta measures the rate of change in the price of an option contract. Gamma measures the rate of change in an options delta per a 1-point move in the underlying security.

A delta of 50 means it has a 50-50 change of expiring in the money at expiration. If an options delta exceeds 50, it is in-the-money. Options delta less than 5o is considered out-of-the-money.

Ultimately, there is no universally "good" delta for options. The ideal delta depends on the individual trader, risk tolerance, trading strategy, and overall market outlook. 

A 30 delta in options means it has a 30% chance of expiring in the money at expiration. It has a 70% chance of expiring out of the money.

It depends. Higher deltas may be tolerable for those comfortable with high-risk, high-reward trading strategies. But for those with a weaker stomach, lower-risk strategies with lower-risk may be the way to go. 

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