Δ Delta | Understanding – Key to Position Analysis

Definition of Option Delta

Its basic understanding is at what rate the option price is going to move with a change in the price of the underlying.

Got this definition from Investopedia.

Δ (Delta) represents the rate of change between the option’s price and a $1 change in the underlying asset’s price – in other words, price sensitivity. Delta of a call option has a range between zero and one, while the delta of a put option has a range between zero and negative one

 

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What is Option Delta?

The option value of the delta change from +1 to -1.  The value of the delta for different strike prices is different. At the same time value of delta for Call Options is different from that of Put Option. Now the value of an option for short is different from that of long.

So this brings us to the below-mentioned situation

Put Option Delta Value (Approx Values)

Put Long ITM – -1

Put Long ATM – -.5

Put Long OTM – -.01

Put Short ITM – +1

Put Short ATM – .5

Put Short OTM – .01

Call Option Delta Value (Approx Values)

Call Long ITM – 1

Call Long ATM – .5

Call Long OTM – .01

Call Short ITM – -1

Call Short ATM – -.05

Call Short OTM – -.01

Now to understand the above value better let’s explain with an example. The delta value of a long Future contract would be 1 because for every 1 rupee increase in the index of underlying the future contract would increase by 1. For example, the Index Nifty is 9000 in the morning and by the closing time it has fallen by 100 points and hence the future contract also has fallen by 100 rupees. This clearly explain how delta works

Now negative delta works exactly opposite way. The delta value of a short future is -1. For every 1 rupee increase in the index, the price of the future would fall by 1 point. For example, the Index Nifty is 9000 in the morning and by the closing time it has fallen by 100 points and hence the future contract would have risen by 100 rupees.

FutureIndexDelta of FutureChange in UnderlyingLongRise1100LongFall1-100ShortRise-1-100ShortFall-1100

So when option is Deep ITM the option reacts exactly like a future. So the value of Deep ITM is either +1 or -1 based on wether the position is Long or Short.

Call Option Deep ITM at 8400 value of Delta is +1 & Put Option Deep ITM is -1

Time and its Effect on Delta

The price of the underlying keep the same over a period of time the value of the delta keeps changing. In the below-mentioned case, the underlying contract is Nifty and the contract size of the contract is a unit of 75. So the maximum value of the delta for the contract goes from -75 to +75.

Call Option

At the Money contract as the time passes the value of the contract increase keeping the underlying at the same price.

ITM option delta value remains at +75 until the expiry of the contract. Only once the price of the underlying changes below the price of the strike price, in this case, it is 8500 and delta value will start dropping.

OTM Call Option behaves in a similar manner of the ATM, not much difference.

PUT OPTION

Out of Money Put options, the value of the Delta gradually reaches to -60 while the underlying price remaining the same. This is the risk of the delta which increases as the contract is near to expiry.

At the money Put option, there is some change of the period of time.

Just like In the Money Call Option the In the Money Put option value stays at -75.

Time does have an impact on the holding position of the delta without the movement of the underlying and other things kept the same.

 

How to see the Delta Differently

Delta can be avoided but cannot be ignored. Delta, in other words, is the risk of the position. Options portfolio manager usually manage the risk of the entire portfolio with the help of the Delta value.

Most important tool to manage the entire option Portfolio. Now the question arises why do we need to manage the delta of the portfolio. The answer would be given in the upcoming posts.

Does Delta Neutral Option strategies always word? What are the delta neutral options strategies?

 

Movement of Price how it effects Delta

As the price of the underlying moves from Out of the Money to In the Money the value goes to the maximum of +1. When it reaches the value of 1 it acts exactly like the underlying. Hence by looking at the value of delta one can understand the risk and manage the entire position.

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