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Delta is the change in value of an option in relation to the change in the underlying asset’s price. Each time the underlying asset moves 1 percentage point, the price of the option also moves. If the percentage of movement in the option is the same as the underlying, the option has a delta of 1. If less, the amount of movement is between .99 and 0.01. If there is no movement in the option when the underlying moves at all, delta is zero. Delta is often expressed without the decimal point. A delta of .99 would be expressed as 99.

Delta has positive and negative indicators. A positive delta is reserved for calls and has a maximum of positive one, with higher delta indicating more movement. A negative delta is reserved for puts and has a minimum of negative one, with lower delta indicating more movement. A put option is the direct inverse of a call option on the same underlying asset. The premium on a put falls if the underlying price increases, but it increases on a call.

Delta Movements

Delta isn’t a static number. It rises and falls over time. If an underlying asset’s price increases, call values increase as well, and put prices decrease. If underlying prices decrease, call values decrease, and put prices increase. But price movements are different degrees at different points of pricing: “In the money” options move more than “out the money” options. Short term options have a higher reaction than long term options. This has a real impact. A higher delta, positive or negative, is more likely to exceed the exercise price in comparison to a low delta.

A call’s delta increases as the underlying asset’s price rises and moves higher “in the money”. A put’s delta increases as the underlying asset’s price falls, and moves deeper “in the money”. The deeper “in the money” the option is, the higher its chances of expiring “in the money”. If it moves the opposite way, the deeper “out the money” it is, the higher the chance it will expire “out the money”. Delta adjusts for these changes. As an option’s underlying asset’s price moves closer to the money delta rises. As an option’s underlying asset’s price moves further away delta decreases. The rate of change is determined by Gamma, another Greek Option Indicator.

Price & Value Alignment

If the asset is “in the money” on the day of expiration, it will essentially become worth the same as the underlying since it can be exercised. Any change in the asset’s price must also occur in the option itself, since it is essentially the same value. The delta moves to a perfect positive one for a call or negative one for a put. The opposite occurs in “out of money” options. As they move towards expiration, they lose their value. They can’t be exercised for buying or selling. They’re worthless and their value moves to zero. This movement occurs extremely quickly approaching the asset’s expiry date.

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