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Delta

In statistics, the term "Delta" is used to signify change. In options, Delta is used to estimate the change in an option's premium as the price of the underlying asset changes. As the option becomes more valuable, the premium required to buy the option increases. Similarly, if an option becomes less valuable, the premium decreases.

For calls, Delta increases from 0 and 1 as the strike price decreases from the highest offered down to lowest. The deepest in-the-money calls have a Delta of 1. For puts, the delta decreases from 0 to -1 as the strike price increases from the lowest offered up highest. The deepest in-the-money puts have a delta of -1.

The delta estimates the change in premium versus a $1 alteration in the price of the underlying asset.

Traders consider delta as the approximate probability of that option finishing in the money by expiration. In other words, if you have an upside call far away from the current price with a delta of 10 then it would be viewed as a 10% probability of the stock finishing above that strike price.

MarketChameleon.com displays the delta in the stock’s Option Chain page.

Example

Let's assume IBM is trading at $150.00, and a call option for the 155 strike has a delta of 0.300 and a current price of $1.90. If the price of IBM stock goes up $1 to $151.00, the price of the call option at 155 should go up $0.30, and would now be worth $2.20.

On the flip side, for a put at the 155 strike, if the delta is -0.650, and the current put price is $6.10, then after the stock has gone up to $151.00, it is expected that the put price would go down to $5.85. Negative deltas have a negative relationship with stock price. As the stock price goes up, the put price goes down.

Take a look at the following table, which is pulled from the option chain for IBM [IBM Option Chain]. You'll notice sample delta figures in the columns next to the price and implied volatility (IV). The at-the-money strike is higlighted. Strikes near at-the-money usually have deltas roughly equal to 0.50 (or -0.50). Strikes that are deep in-the-money have deltas approaching 1.0 (or -1.0). Strikes that are deep out-of-the money have deltas that approach 0.

Delta Bid IV Bid Ask Ask IV Strike Bid IV Bid Ask Ask IV Delta
Calls Puts
0.90 3.0 11.55 14.20 37.3 140.00 22.0 1.10 1.15 23.2 -0.15
0.75 18.5 7.55 8.15 22.0 145.00 20.2 1.90 2.05 21.0 -0.25
0.55 17.9 4.20 4.40 18.8 150.00 18.5 3.50 3.60 19.0 -0.45
0.35 16.5 1.90 2.00 17.2 155.00 16.6 6.05 6.25 17.6 -0.65
0.15 15.5 0.60 0.65 16.2 160.00 13.9 9.60 10.40 20.0 -0.85