EXHIBIT 2.1 Call value compared with stock price.
Definition 3 : In terms of absolute value (meaning that plus and minus
signs are ignored), the delta of an option is between 1.00 and 0. Its price can
change in tandem with the stock, as with a 1.00 delta; or it cannot change at
all as the stock moves, as with a 0 delta; or anything in between. By
definition, stock has a 1.00 delta—it is the underlying security. A $1 rise in
the stock yields a $100 profit on a round lot of 100 shares. A call with a
0.60 delta rises by $0.60 with a $1 increase in the stock. The owner of a call
representing rights on 100 shares earns $60 for a $1 increase in the
underlying. It’s as if the call owner in this example is long 60 shares of the
underlying stock. Delta is the option’s equivalent of a position in the
underlying shares .
A trader who buys five 0.43-delta calls has a position that is effectively
long 215 shares—that’s 5 contracts × 0.43 deltas × 100 shares. In option
lingo, the trader is long 215 deltas. Likewise, if the trader were short five
0.43-delta calls, the trader would be short 215 deltas.
The same principles apply to puts. Being long 10 0.59-delta puts makes
the trader short a total of 590 deltas, a position that profits or loses like
being short 590 shares of the underlying stock. Conversely, if the trader
were short 10 0.59-delta puts, the trader would theoretically make $590 if
the stock were to rise $1 and lose $590 if the stock fell by $1—just like
being long 590 shares.
Definition 4 : The final definition of delta is considered the trader’s
definition. It’s mathematically imprecise but is used nonetheless as a
general rule of thumb by option traders. A trader would say the delta is a
statistical approximation of the likelihood of the option expiring in-the-