Delta is an option Greek that measures the rate of change in an option’s price in response to a change in the price of the underlying asset. If the underlying stock, or other security, increases by one dollar in price, the option contract should increase in price by the delta value (all else being equal). Delta is expressed as a number between 0 and 1 for call options, and between -1 and 0 for put options.
For call options, a delta of 0.5 means that if the underlying asset increases in price by $1, the option’s price will increase by $0.50. Conversely, if the underlying asset decreases in price by $1, the option’s price will decrease by $0.50. For put options, a delta of -0.5 means that if the underlying asset increases in price by $1, the option’s price will decrease by $0.50, and if the underlying asset decreases in price by $1, the option’s price will increase by $0.50.
Delta also indicates the probability that an option will expire in-the-money. A delta of 0.5 for a call option means that there is a 50% chance the option will expire in-the-money, while a delta of -0.5 for a put option means there is a 50% chance the option will expire in-the-money.
Delta can be used by traders to assess the risk and potential reward of an options trade. High delta options can offer greater potential gains but also greater potential losses, while low delta options offer more limited gains and losses but can provide greater downside protection.
