## Posts Tagged ‘option greeks. option delta’

## Options Basics – Making Money With Delta

The most popular Greek is Delta which measures how much an option’s price moves as a result of a $1.00 price change in the underlying stock. Call option values rise with the underlying stock while put prices move inversely with the underlying stock price. Therefore, the deltas of calls and puts must be expressed differently. If the option price moves exactly the same (dollar-for-dollar) as the stock price, then the call will have a delta of 1.0 while the put will have a delta of -1.0. If the option only moves 0.4 for a dollar move in the stock price, the delta is 0.4 for a call and -0.4 for the put.

Delta is typically expressed as a fraction or percentage. A 0.4 delta can be expressed as 45% meaning that the option will change value of 45% for every dollar move in stock price. Delta is useful for options at different strike prices. For example:

Under Armour stock is trading at $67.14 – (a $3 increase in stock price equals);

the current month $67.50 call has a delta of .478 – ($1.43 change in option);

the $65 call has a delta of .666 – ($2.00 increase);

the $70 call has a delta of .289 – ($0.87 increase);

the $67.50 put has a delta of -.521 – (-$1.56 decrease);

he $65 put has a delta of -.329 – (-$0.99 decrease);

the $70 put has a delta of -.726 – (-$2.18 decrease).

As you can see, delta calculations are not difficult but it gives you information for making investing decisions. Compare the option price change between a call and put at the same strike price. At the $67.50 ATM call strike price, a $3 increase in Under Armour caused the call to increase $1.43 while the put decreased -$1.56 because of the different deltas.

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Also (not shown in example), as a call moves more into the money, some time value is converted to intrinsic value. This time value conversion is not the result of delta. This will work for both calls and puts as the underlying stock price changes.

In general, the more in-the-money the option, the higher its delta. Only deep ITM options will have a delta of 1.0 although many ITM options will have a delta close to 1.0 near expiration. Options OTM will have a delta of less than .30 as seen by the $70 Under Armour call above.

Delta matters as it can lose value fast. For example, if you sold the $70 Under Armour call when the stock was at $67 then the call delta was 0.289. Then the stock drops which makes the $70 call further out of the money. Delta is also dropping with stock price decrease. By the time the stock drops below $65 the delta could be at or below 0.20. If you decide to buy the call to close, it would be more expensive to purchase because as delta falls the call loses value at a progressively slower and slower rate.

Clearly, the options delta changes to the underlying stock price dependent on whether the option is:

- OTM (option not winning so delta is low)

- ATM (option very close to winning so has a high delta)
- ITM (option is winning so it has a very high delta)

This dynamic is truest for the current and next month options. When options get further out in time, the delta dynamics begin to change. The greater the time to expiration means more opportunity for losing options to win and for winning options to lose. In general, the ITM option will have a higher delta for a LEAP compared to current delta while the OTM LEAP option will have a lower delta than the current delta.

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