Delta
Measures the rate of change of options premium based on the directional movement of the underlying.
The Delta measures how an options value changes with respect to the change in the underlying.
In simpler terms, the Delta of an option helps us answer questions of this sort – “By how many points will the option premium change for every 1 point change in the underlying?”
The following example should help you understand this better –
Nifty at 11500
Option Strike = 11500 Call Option
Premium = 104
Delta of the option = + 0.53
Nifty is expected to reach 11600 at the end of the day
What is the likely option premium value at end of the day?
We are expecting the underlying to change by 100 points (11600– 11500), hence the premium is supposed to increase by
= 100*0.55
= 55
Therefore the new option premium is expected to trade around 159 (104+55)
Let us pick another case – what if one anticipates a drop in Nifty? What will happen to the premium? Let us figure that out –
Nifty @ 10:55 AM is at 8288
Option Strike = 8250 Call Option
Premium = 133
Delta of the option = 0.55
Nifty is expected to reach 11400 at the end of the day
What is the likely premium value at 3:15 PM?
We are expecting Nifty to decline by – 100 points (11500 – 11400), hence the change in premium will be –
= – 100 * 0.55
= – 55
Therefore the premium is expected to trade around
= 104 – 55
= 49 (new premium value)
As you can see from the above two examples, the delta helps us evaluate the premium value based on the directional move in the underlying. This is extremely useful information to have while trading options.