What Is Delta?
Delta is a measure of how sensitive an option's price is to changes in the price of the underlying asset. It is one of the most crucial metrics in options trading, as it indicates how much the option's price will move in response to a change in the underlying stock price.
(Like other options Greeks, delta is analyzed under the assumption that all other parameters of the option remain constant.)
For instance, if an option has a delta of 1.5, it means that for every 1 cent movement in the underlying stock price, the option's price will move by 1.5 cents.
Therefore, an option with a high delta will experience more significant price changes, either increasing or decreasing in value, depending on the direction of the underlying stock price movement. Conversely, an option with a low delta will be less responsive to changes in the underlying stock price.
How Is Delta Used?
The information provided by delta is invaluable, especially since investors rarely hold options until their expiration. Knowing the potential profit or loss from a price movement helps investors decide whether to hold or sell the option.
Complication
However, there is a complexity with delta: it changes as the underlying asset's price moves. For example, an option with a delta of 1.5 might move 1.5 cents for every 1 cent change in the underlying asset's price, but the delta could then shift to 1.6.
This means any further increase in the stock price will result in an even larger increase in the option's price. This phenomenon is an example of positive gamma, which will be explained in our next lesson, and can be thought of as the price "accelerating" higher.