What Is Delta?
Definition: Delta “Δ” is the rate of change of option premium with
respect to the unit change in the underlying stock or index price.
Some common factors about Delta:
- Delta of a script or index is not constant.
- All different strike call and put having different expiry date have different delta.
- Sensitivity of the option premium differs by their nature of contract, expiry date, type of option and the strike. Hence delta differs in each point.
- Delta is always represented in terms of whole number with % symbol or with decimal point.
Example: On 20th August 2006 IPCL 280 call option was
trading at Rs 13/- having delta 50% or 0.50. That time IPCL was quoting at
Rs278/-. How does any change of Rs 3/- in IPCL price will affect the price of
280 call option?
Change in Stock Price X Delta = Change in Option Price.
Rs 3 X
0.5 = Rs 1.5.
Hence
the change of +3 rupees in IPCL will make a theoretical change of +Rs1.5 in the
280 call option price i.e. Rs13 + Rs1.5 = Rs14.5.
Change of -3 rupees in IPCL
will make a theoretical change of - Rs1.5 in the 280 call option price to Rs13 - Rs1.5 = Rs 12.5.
'Call Option Delta' is always positive and varies from 0 to 1. Wifh respect to the time as we will be nearing towards the expiry. 'Deep in the money call option’ delta will become 1. ‘At the money call option' delta will stay at 0.5 and 'out of money call option' delta will cease 0.
'Put Option Delta' is always negative. It is 0 to -I for 'deep in the money put options' and 0 for ‘far out of money put options', -1 to 0 for 'in the money and -0.50 for ‘at the money put options'.
One interesting fact about delta is that if you will sum up the absolute value of the put delta and the call delta having same strike it will be always 1.
Mathematically delta is the slope of the tangent drawn in the price curve where option premium represents y axis and price of the underlying script represents x axis.
'Call Option Delta' is always positive and varies from 0 to 1. Wifh respect to the time as we will be nearing towards the expiry. 'Deep in the money call option’ delta will become 1. ‘At the money call option' delta will stay at 0.5 and 'out of money call option' delta will cease 0.
'Put Option Delta' is always negative. It is 0 to -I for 'deep in the money put options' and 0 for ‘far out of money put options', -1 to 0 for 'in the money and -0.50 for ‘at the money put options'.
One interesting fact about delta is that if you will sum up the absolute value of the put delta and the call delta having same strike it will be always 1.
Mathematically delta is the slope of the tangent drawn in the price curve where option premium represents y axis and price of the underlying script represents x axis.
