Option information and strategies

The option's delta is the amount an option price is expected to change with respect to its underlying stock price. The delta of an option ranges in value from 0 to 1 for calls and 0 to -1 for puts  which reflects the increase or decrease in the price of the option in response to a $1 dollar movement of the underlying stock price.

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 Way out of the money options have delta values close to 0 while deep in the money options have deltas that are close to 1.

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At-the-money call options typically have a delta of 0.5, and the delta of out-of-the-money call options approaches 0 as expiration nears. The deeper in-the-money the call option, the closer the delta will be to 1, and the more the option will behave like the underlying stock.

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At-the-money put options typically have a delta of -0.5, and the delta of out-of-the-money put options approaches 0 as expiration approaches. The deeper in-the-money the put option, the closer the delta will be to -1.

 

 

Examples of Delta

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Let's assume that Disney (DIS). Shares of its stock are bought and sold on a stock exchange, and there are put options and call options traded for those shares. 

The delta for the call option on Disney shares is .45. That means that a $1 change in the price of Disney stock generates a $.45 change in the price of Disney call options.

Thus, if Disney’s shares trade at $100 and the call option trades at $2, a change in the price of Disney’s shares to $101 means the call option will increase to a price of $2.45.

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Put options work in the opposite way. If the put option on Disney shares has a delta of -$.55, then a $1 increase in Disney's share price generates a $.55 decrease in the price of Disney's put options.

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So if Disney’s shares trade at $100 and the put option trades at $2, then Disney’s shares increase to $101, and the put option will decrease to a price of $1.45.