32 lines
1.9 KiB
Plaintext
32 lines
1.9 KiB
Plaintext
Delta
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The five figures commonly used by option traders are represented by Greek
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letters: delta, gamma, theta, vega, rho. The figures are referred to as option
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greeks. Vega, of course, is not an actual letter of the greek alphabet, but in
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the options vernacular, it is considered one of the greeks.
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The greeks are a derivation of an option-pricing model, and each Greek
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letter represents a specific sensitivity to influences on the option’s value. To
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understand concepts represented by these five figures, we’ll start with delta,
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which is defined in four ways:
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1. The rate of change of an option value relative to a change in the
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underlying stock price.
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2. The derivative of the graph of an option value in relation to the stock
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price.
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3. The equivalent of underlying shares represented by an option
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position.
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4. The estimate of the likelihood of an option expiring in-the-money. 1
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Definition 1 : Delta (Δ) is the rate of change of an option’s value relative
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to a change in the price of the underlying security. A trader who is bullish
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on a particular stock may choose to buy a call instead of buying the
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underlying security. If the price of the stock rises by $1, the trader would
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expect to profit on the call—but by how much? To answer that question, the
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trader must consider the delta of the option.
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Delta is stated as a percentage. If an option has a 50 delta, its price will
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change by 50 percent of the change of the underlying stock price. Delta is
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generally written as either a whole number, without the percent sign, or as a
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decimal. So if an option has a 50 percent delta, this will be indicated as
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0.50, or 50. For the most part, we’ll use the former convention in our
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discussion.
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Call values increase when the underlying stock price increases and vice
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versa. Because calls have this positive correlation with the underlying, they
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have positive deltas. Here is a simplified example of the effect of delta on
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an option: |