W What does delta measure?
Delta measures the rate of change of an option's price given a plus or minus change of $1 in the underlying price. Delta answers, "If the underlying increases or decreases by $1, by how much will the option price increase or decrease?". For us math nerds, delta can be thought of as the derivative of an option's price. Option Price Deltas Option price deltas range form 1.0 to +1.0. If an option price has a delta from 1.0 to 0, it has a negative delta. If an option price has a delta from 0 to +1.0 it has a positive delta. Positive and negative deltas are important in assessing our directional assumptions regarding the options transactions. Let's take a look: Options Transactions and Delta Signs
Delta Benefits An option's delta is equivalent to the probability of being ITM. As established earlier, sellers want the options they've sold to expire ITM in order to profit. Therefore, sellers can use deltas to assess the probability of ITM. Similarly, buyers can use deltas to assess the probability of the option expiring OTM (where they profit). For example, if we sell a + 50 delta call, there is 50% chance the option will be ITM, and a 50% the delta will be OTM. What if the delta is negative? If we sell a 30% delta call, there is 30% of the option expiring OTM and therefore a 70% of the option expiring ITM. 16 Delta You might often hear of the mysterious "16 delta". What does this even mean? If we look at a one standard deviation move on the traditional bell curve, the distance from the mean is 34% on either ends. The width is approximately 68%, leaving 16% percent flaps near each tail end. If we sell a 16% delta call, this means we have an 84% (16% flap we mentioned earlier + 68%) chance of the option expiring ITM (success!). This is usually the sweet spot we like to look for when trading.
1 Comment
2/11/2019 05:14:41 am
In stock market, there are terms you should be familiar of first before you enter that world. Ever since, it has always been a desire of me to be in the world of stock market. Unit I realized that it require too much time and I need to allot more for it! The word "delta" sounds new to me. If you are inside the said world, you would know how important it is. Huge thanks for explaining its importance! Because of your post, I had the eagerness to work hard and finally make it there!
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NishaNinteen yearold trader, future connoisseur of options. Follow me on Twitter!
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