Delta — Concept Explainer Video

Transcript

The first response to a price move

Delta estimates how much an option price changes for a small one unit move in its underlying, with other inputs unchanged. Think of it as the option's current directional sensitivity, rather than a fixed percentage return.

A call example

A call priced at four dollars has delta point six. If the stock rises one dollar, the first order estimate is a sixty cent increase, taking the option to about four dollars sixty. This is an approximation, not a promised quote.

Puts point the other way

A put with delta minus point four loses about forty cents for a one dollar stock rise, all else equal. Multiply by the contract size for position exposure: one long call with delta point six and a one hundred multiplier has sixty share equivalents.

Delta changes too

Delta moves as the underlying, time, and implied volatility change. Gamma measures its response to underlying movement. Delta is sometimes used as a rough moneyness probability proxy, but it is not a guaranteed probability of profit.

Use the sign and the size

Positive position delta benefits from a small rise; negative delta benefits from a small fall, other inputs fixed. Selling reverses the sign. Read delta in consistent units, and remember that it is only one part of the option risk.