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 Option Delta ∆: A first Attempt
Issued on November 08 2011 par Strategies-Options.com
Option price does not move in a constant way
As far as one trades options, the first surprising thing is the asymmetry between gains and losses for the buyer and the seller.
For a call or a put, the only risk the buyer incurs is to lose the premium. But rewards could be great, the whole rise beyond the strike for the call, the whole decrease below the strike for the put. The more an option is in the money, the more the profits for the buyer. As far as the premium can't be negative but at least worth zero, it's easy to see that there is a speed in option value with respect to the spot move. One needs to evaluate this speed, to know how much money would be earnt or lost if the spot moved. Thus, one defines the rate of change of option value with respect to the spot. It means the option speed with respect to the spot. It's called delta. For example : Imagine the same day an option is worth $6 if the spot is $100, but is worth $7.5 if the spot is $102. The delta is then : (7.5-6)/(102-100)=1.5/2=0.75 or 75% . Next : Option Delta ∆ Previous : The Greeks : A First Attempt OPTIONS 101 - INDEX OPTIONS 101 - CHAPTER I OPTIONS 101 - CHAPTER II OPTIONS 101 - CHAPTER III OPTIONS 101 - CHAPTER IV OPTIONS 101 - CHAPTER V OPTIONS 101 - CHAPTER VI Strategies-Options.com |
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