Delta is one of the “Option Greeks”. Delta is the change in the options price compared to the change in the price of the underlying asset. It is also considered the rate of change of the price of the option with respect to its underlying security's price.
In practice, the delta of an option ranges in value from 0 to 1 for calls (0 to -1 for puts) and reflects the increase or decrease in the price of the option in response to a 1 point movement of the underlying asset price.
Effect of “Moneyness” on “Delta”.
The delta of near market priced options is maximal or close to 1.0 or -1.0. As you get further from current market price Delta diminishes and changes in the market price of the underlying have less effect on the price of the option. The extreme of effect of this principle is that the effect of delta on Far OTM out-of-the-money options is very close to zero and it is said that they have a delta values close to 0. This is in contrast to, or the opposite of At-The-Money ATM Options or ITM options, where a change in the price of the underlying has a large effect on the price of the option, so the delta of these options is large and approaches 1.0 or -1.0.
This is explained by two factors.
ITM options have intrinsic value which is predicated upon the strike price giving the option value separate from its time value or extrinsic value. For example an option 1 point in the money or one point below the current market price has an intrinsic value of at least one point. This intrinsic value means a small change in the price of the underlying has a greater change on the price of the option. Second, because a large portion of the options value is intrinsic, time decay or Theta has a much smaller effect on the value of these ITM options. In contrast, OTM Out-of-the-money options have zero intrinsic value, so a disproportionate amount of their value is Extrinsic or time value. So they are much more heavily effected by time decay or Theta decay. This is why the concept of “Moneyness” is such an important one in options trading. If one is a buyer the Greeks of “Delta” and “Theta” help explain why ATM and OTM options have such different probabilities of profit outside of the obvious percentile mediated probabilities.
You will find that there are a few terms in option trading, which you need to understand very well. Moneyness, Delta, Theta, Vega and Time Decay are very important. The “Greek” Gamma is important, but more important for “Short Term” Option Traders, such as Weekly option traders. I recommend that you understand the effects the Greeks have on your Option Trading style, as this will help to make your trading more successful. Finally, if you think options trading is to complicated, I suggest you take heart. Driving a automobile has more rules, exceptions and nuances and most of you can do that, so you can do this.
Happy Trading,
✍️ written by Shortsegments
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