Delta is the measure of an option’s sensitivity to changes in the price of the underlying asset. Therefore, its is the degree to which an option price will move given a change in the underlying stock or index price, all else being equal.
For example, an option with a delta of 0.5 will move Rs 5 for every change of Rs 10 in the underlying stock or index.
Far out-of-the-money calls will have a delta very close to zero, as the change in underlying price is not likely to make them valuable or cheap. An at-the-money call would have a delta of 0.5 and a deeply in-the-money call would have a delta close to 1.
While Call deltas are positive, Put deltas are negative, reflecting the fact that the put option price and the underlying stock price are inversely related. This is because if you buy a put your view is bearish and expect the stock price to go down. However, if the stock price moves up it is contrary to your view therefore, the value of the option decreases. The put delta equals the call delta minus 1.
| Call option |
|
|
Change |
| Spot price |
1,070 |
1,071 |
1 |
| Exercise price |
1,080 |
1,080 |
0 |
| Interest |
10% |
10% |
0 |
| Volatility |
25% |
25% |
0 |
| Time(days to expiry) |
11 |
11 |
0 |
| Delta |
0.4520 |
|
|
| Option price |
15.5275 |
15.9761 |
0.4487 |
In the above example with every 1 point change in the index the price of the option will change by Rs 0.45. When we actually change the spot price by 1 point keeping all other parameters same, we find that the call option price has gone up by Rs 0.44. As you can see there is a slight deviation, but this is normal.
Note that the delta changes with movements in the underlying stock or index and time to expiration and therefore the value would be continuously changing.
