Basics of Option's Delta: With Examples

13 Apr 2023

Option's DELTA represents the change in price of an option with respect to change in price of an underlying.

Let's understand briefly with the help of Nifty example.

1️⃣
In the above Nifty example,
17750 is an At the Money CE option.
Delta of ATM CE is near 0.5
Which means that if spot moves 10 points, 17750 CE will move 5 points.
Normally ATM options are highly volatile options.

2️⃣
17700 is slightly In the Money CE.
Delta is 0.7, means if spot moves up 10 points, the CE option will move up by 7 points.
Volatility is fairly high in this one too but less compared to 17750.

⚡If you open the chart of the above options, you will see spikes with lot of wicks above and below the candles (if market stays around these levels). Also, there will be a lot of breakout/breakdown failures over the swing highs and lows in the intraday. This is due to highly volatile nature of ATM options.

3️⃣
17650 and 17600 are deeper In the Money CE options.
You can see that the delta is around 0.9
It means that if index moves 10 points, these CE option will move 8-9 points also.
These options are less volatile compared to ATM options.

⚡The deeper the CE option, the higher would be the delta, but the value of Delta never exceeds 1.
You should note that deep ITM options just behave like the underlying Futures. Means a 1-point movement in the underlying equals 1 point move in the option.
So, if you don't want to trade futures for some reason, you can trade with deep ITM options.

⚡⚡Remember that Delta varies as the market moves.
Ex if market moves down by 100 points, in this example, then Delta of 17650 CE will become 0.5 as it will be ATM at that point.
This behavior along with higher Theta of ATM needs more attention.

⚡Needless to mention, the Delta of Out of the Money CE options remains less than 0.5 and it keeps on decreasing as we move deeper into OTM CE options.
Ex Delta of 17900 CE is 0.05 while publishing this post on the expiry day. This is the reason that an OTM CE will have bare minimum movement with respect to movement in the underlying.

Disclaimer: I don't call myself an option expert and I am not much into complex option strategies. But this is the least that one should know as an option trader.

Do like for more informative posts in the future.
Regards

15 Apr 2023

Catatan

There is one more interpretation of Delta
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The Delta value also tells us the probability of an option to expire ITM.
Ex the value 0.5 of an ATM CE option is telling us that there are 50% chances that the option would expire ITM. Also, the value 0.8 of a deep ITM CE option is telling us that there are 80% chances that this option would expire ITM.


Is the Delta of an option always stays Positive?
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We know that CE Premium increases with the increase in value of the underlying. Therefore, there is a positive relationship.
So, the Delta of CE option varies between 0 to 1 and stays positive.

But PE Premium decreases with the increase in value of the underlying. Therefore, there is a negative relationship.
So, Delta of PE option varies between -1 to 0 and stays negative.