Delta is a real number between 0 and 1 that tells you the instantaneous change in the option price as the price of the underlying security changes.
For example, if option XYZ has a strike of 10, trading for $1.00, and underlying stock is at 10 bucks.. if the underlying goes from 10 bucks to 11 bucks, if the option price goes to $1.60 (a change of 60 cents per 100 cents in the underlying), the delta is 0.60 or 60%.
Of course, at $11/share, another one dollar increase of the underlying security will increase the option price more.. so for example, if the underlying goes up to $12/share, and the option goes to $2.30, that means the delta at that price is 0.7 or 70%.
Better example: See those QQQ August 90 call options? The delta on that right now is so close to zero it's not worth calculating. The delta on the QQQ August 25 call options is SLIGHTLY under 1.
A good rule of thumb is that an at-the-money option has a delta of ROUGHLY 50%. More implied volatility means lower delta, and less implied volatility means higher delta.
So delta is a function of the standard black-scholes variables, the important ones being: option price, volatility, strike price, time remaining, and price of underlying security. It's not a very difficult concept to grasp.
Oh, one last thing.. Delta is a derived variable, so how you go about calculating it depends on what option model you use to value them. But black-scholes is generally a good enough approximation. |
