Delta is one of the Greeks in options trading. It measures how much an option's price changes when the underlying asset price moves by one dollar. For example, if a call option has a delta of 0.5, the option price will increase by 50 cents when the stock price increases by one dollar.
Delta ranges differ between call and put options. For call options, delta ranges from 0 to 1. A delta of 0.7 means the option price increases by 70 cents for each dollar increase in the stock price. For put options, delta ranges from negative 1 to 0. A delta of negative 0.3 means the option price increases by 30 cents when the stock price decreases by one dollar.
Delta is closely related to an option's moneyness. For in-the-money options, delta is close to 1 for calls or negative 1 for puts, indicating high sensitivity to stock price changes. At-the-money options have delta around 0.5 or negative 0.5. Out-of-the-money options have delta close to 0, meaning they are less sensitive to stock price movements. Delta also represents the approximate probability that the option will expire in the money.
Delta hedging is a risk management strategy used to create a position that is neutral to small price movements in the underlying asset. For example, if you own 100 call options with a delta of 0.6, you can hedge by shorting 60 shares of the underlying stock. This creates a net delta of zero. The benefit is reduced directional risk, allowing traders to profit from time decay and volatility changes rather than stock price movements.
To summarize what we have learned about delta: Delta measures how sensitive an option's price is to changes in the underlying asset price. Call options have delta ranging from 0 to 1, while put options range from negative 1 to 0. Delta also represents the approximate probability that an option will expire in the money. Delta hedging allows traders to create market-neutral positions for effective risk management. Understanding delta is fundamental for successful options trading.