Explaining The Greeks: DELTA
In case you prefer to read the blog version of the report, it is listed below. I have included an example as well.
What is DELTA?
Delta is one of the four major risk measures in options trading. It measures the amount an options price is affected by a $1 price change in the underlying stock. DELTA is measure on a scale from 0.00 to 1.00 for call options, and 0.00 to -1.00 for put options. Delta is the main component in measuring leverage. This can be done by: (delta/option price)*current stock price. Remember a delta of 0.45 results in a 45 cents change in options prices, which is a $45 change in options value, with every $1 move in stock price. The leverage through this can be huge. As expiration approaches, the delta for in the money options will approach 1.00, whereas, for out of the money options, the delta will approach zero. Delta unofficially is also the probability that the option will expire in the money.
EXAMPLE:
CASH: $100
Current Stock Price: 25/share
Call Option: Strike: 26, Cost: 0.50, DELTA: 0.80
Before expiration the price of the stock rises to $26 per share
If you would have out right purchased shares, it would have costed you $100 for 4 shares.
If you would have bought two call options it would have costed you $100, and you have the right to 200 shares of stock
At expiration your shares, if purchased, would be worth $26 each, or a $4 P/L.
At expiration your contract would be in theory worth 1.00, or $100 each, $200 P/L.
We can calculate your leverage at purchase to be (0.80/0.50)*25 = 40X leverage
PLEASE NOTE: The numbers listed above are extremely unrealistic numbers, I used them for simplicity's sake.
PLEASE NOT: You must have sold your option prior to expiration in order to cash out on your gains.
What is DELTA?
Delta is one of the four major risk measures in options trading. It measures the amount an options price is affected by a $1 price change in the underlying stock. DELTA is measure on a scale from 0.00 to 1.00 for call options, and 0.00 to -1.00 for put options. Delta is the main component in measuring leverage. This can be done by: (delta/option price)*current stock price. Remember a delta of 0.45 results in a 45 cents change in options prices, which is a $45 change in options value, with every $1 move in stock price. The leverage through this can be huge. As expiration approaches, the delta for in the money options will approach 1.00, whereas, for out of the money options, the delta will approach zero. Delta unofficially is also the probability that the option will expire in the money.
EXAMPLE:
CASH: $100
Current Stock Price: 25/share
Call Option: Strike: 26, Cost: 0.50, DELTA: 0.80
Before expiration the price of the stock rises to $26 per share
If you would have out right purchased shares, it would have costed you $100 for 4 shares.
If you would have bought two call options it would have costed you $100, and you have the right to 200 shares of stock
At expiration your shares, if purchased, would be worth $26 each, or a $4 P/L.
At expiration your contract would be in theory worth 1.00, or $100 each, $200 P/L.
We can calculate your leverage at purchase to be (0.80/0.50)*25 = 40X leverage
PLEASE NOTE: The numbers listed above are extremely unrealistic numbers, I used them for simplicity's sake.
PLEASE NOT: You must have sold your option prior to expiration in order to cash out on your gains.
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