## Stock Option Greeks: Delta Explained

Delta is the change in the option’s price or premium due to the change in the underlying futures price.

Calls always have positive delta between 0 and 1.00, while puts always have negative delta between 0 and -1.00.

The delta of a futures contract is 1.00.

Traders usually refer to the delta without the decimal point. So, a .40 delta is commonly referred to as a 40 delta.

Puts generate negative delta because they have a negative relationship with the underlying security—that is, put premiums fall when the underlying security rises, and vice versa.

Conversely, call options have a positive relationship with the price of the underlying asset. If the underlying asset's price rises, so does the call premium, provided there are no changes in other variables such as implied volatility or time remaining until expiration. If the price of the underlying asset falls, the call premium will also decline, provided all other things remain constant.

Being Long a call will result in positive Delta; being short a call results in negative Delta. Conversely, being Long a put results in negative Delta; being short a put results in positive Delta. The absolute value of the Delta also tells the approximate probability that the option will finish in-the-money.

#### Example

For example, suppose that one out-of-the-money option has a delta of 0.25, and another in-the-money option has a delta of 0.80. A \$1 increase in the price of the underlying asset will lead to a \$0.25 increase in the first option and a \$0.80 increase in the second option. Traders looking for the greatest traction may want to consider high deltas, although these options tend to be more expensive in terms of their cost basis since they're likely to expire in-the-money.

An at-the-money option, meaning the option's strike price and the underlying asset's price are equal, has a delta value of approximately 50 (0.5 without the decimal shift).3﻿ 4﻿ That means the premium will rise or fall by half a point with a one-point move up or down in the underlying security.

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