Understanding Options Delta

This item was filled under [ Knowledge, Option Pricing ]

Here are some of the thumb rules that will help you understand Option Greek - Delta -

- Delta is the measure of Change in Option Premium with respect to one Unit move of Underlying.

- For ease of understanding, the value of Delta ranges between 0 to 1. As it can have the sign of +ive or -ive hence resulting in the range from -1 to +1.)

- CALLs have +ive delta, and PUTs have -ive delta

- ATM option has delta = 0.5 (approximately). 

- ITM option have higher Delta. Deeper the ITM option, higher is the delta. eg. – If Nifty is at 5235, then Nifty 5200 Call delta might be 0.55, Nifty 5100 Call delta might be 0.65 and Nifty 4900 Call delta might be around 0.95.

- OITM option have lower Delta. Farther the OTM option, lower is the delta. eg. – If Nifty is at 5235, then Nifty 5300 Call delta might be 0.45, Nifty 5400 Call delta might be 0.35 and Nifty 5500 Call delta might be around 0.15.

- Roughly, Delta indicates the probability of option expiring ITM. This justifies the higher Delta of deep ITM options cause they their delta of 0.92 indicates that 92% of chance, they will remain ITM.

- Futures and Stocks have Delta of +1 i.e. 1 Rs move in stock price will result in change in futures value by appox 1 Rs (give and take minor adjustment).

You will need option analysis tool to find out about the delta or other option greeks. For options trading in Indian Market, you can use the software options oracle.

Happy Trading

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