To The Moon

After reading previous posts, let's talk about a common indicator in options, delta.

In a simple way, delta represents the correlation between stock price and options. If the stock rises by $1, the option will also represent a corresponding delta. Therefore, the delta of a call is positive, the delta of a put is negative.

For example, when the current share price of A stock is $10, 

If the delta of a call option is 0.2 and the option price is $2, then if the stock rises to $11, the price of the option is theoretically 2+1*0.2=2.2

If the delta of a put option is -0.2 and the option price is $2, then if the stock falls to $9, the price of the option is theoretically 2-1*0.2=1.8

The reason why I bolded theoretically is the delta of an option changes dynamically, so it is not such a linear correlation, this is just for the convenience of everyone to understand the meaning of delta.

The delta of a call is between 0 to1, and the delta of a put is between -1to 0. The closer the delta is to 1 or -1, the higher the correlation between the stock and the option. When delta is equal to 1, the stock and option appear exactly the same or opposite trend.

The above two graphs are the call options that expired on November 19, 2021. It is easy to find the in-the-money option with more time value, the delta is closer to 1, the higher the correlation coefficient between stock and the option. As for the out-of-the-money option, the delta is closer to 0, the correlation coefficient between the option and the stock price is lower, the stock will rise, and the option will grow more slowly.

But once the stock price skyrockets on a certain day, the out-of-the-money option becomes an in-the-money option, and the delta will increase exponentially, which earns more profit.

As a buyer, it is better to have a larger delta, so as the stock price rises, the options will also show a stronger correlation

As a seller, it is better to have a smaller delta, so that even if the stock price rises, the option rises slowly, so that the strike price is not reached before expiration, and the premium can be secured.

Delta needs to be used in combination with other indicators in actual operation. If you learn it, go to the simulation market have a try! 

📚Recommend to read

• ​What is an Option? Ask me!​
• ​How to Calculate the Gain & Loss of Options​
• ​What is a Covered Call？Option Strategy Series 1​
• What are Out of the Money Options & In the Money Options?

📒If you want to know more details about Tiger Paper Account, you can click here to watch【Video version of Guidance for Options Paper Account】​

Finally, if you have any questions, please leave a message in the comment section.