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+Chapter 25: LEAPS 
+THE DELTA 
+387 
+The delta of an option is the amount by which the option price will change if the 
+underlying stock changes in price by one point. In an earlier section of this chapter, 
+comparing the differences between LEAPS and short-term calls, mention was made 
+of delta. The subject is explored in more depth here because it is such an important 
+concept, not only for option buyers, but for most strategic decisions as well. 
+Figure 25-5 depicts the deltas of two different options: 2-year LEAPS and 3-
+month equity options. Their terms are the same except for their expiration dates; strik­
+ing price is 100, and volatility and interest rate assumptions are equal. The horizontal 
+axis displays the stock price while the vertical axis shows the delta of the options. 
+Several relevant observations can be made. First, notice that the delta of the at­
+the-money LEAPS is very large, nearly 0.70. This means that the LEAPS call will 
+move much more in line with the common stock than a comparable short-term equi­
+ty option would. Very short-term at-the-money options have deltas of about½, while 
+slightly longer-term ones have deltas ranging up to the 0.55 to 0.60 area. What this 
+implies is that the longer the life of an at-the-nwney option, the greater its delta. 
+In addition, the figure shows that the deltas of the 3-month call and the 2-year 
+LEAPS call are about equal when the options a~e approximately 5% in-the-money. If 
+the options are more in-the-money than that, then the LEAPS call has a lower delta. 
+This means that at- and out-of-the-money LEAPS will move more in line with the 
+common stock than comparable short-term options will. Restated, the LEAPS calls 
+will move faster than the ordinary short-term equity calls unless both options are 
+more than 5% in-the-money. Note that the movement referred to is in absolute terms 
+in change of price, not in percentage terms. 
+The delta of the 2-year LEAPS does not change as dramatically when the 
+stock moves as does the delta of the 3-month option (see Figure 25-5). Notice that 
+the LEAPS curve is relatively flat on the chart, rising only slightly above horizon­
+tal. In contrast, the delta of the 3-month call is very low out-of-the-money and very 
+large in-the-money. What this means to the call buyer is that the amount by which 
+he can expect the LEAPS call to increase or decrease in price is somewhat stable. 
+This can affect his choice of whether to buy the in-the-money call or the out-of­
+the-money call. With normal short-term options, he can expect the in-the-money 
+call to much more closely mirror the movement in the stock, so he might be tempt­
+ed to buy that call if he expects a small movement in the stock. With LEAPS, how­
+ever, there is much less discrepancy in the amount of option price movement that 
+will occur.