Delta(δ) is a theoretical estimate of how much an option’s premium may change given a 1-point move in the underlying. For an option with a δ of .50, an investor can expect about a 50p move in that option’s premium given a Rs.1 move, up or down, in the underlying.
- For purchased options owned by an investor, δ is between 0 and 1.00 for calls and 0 and -1.00 for puts.
- As a call option goes deeper-in-the-money, δ approaches 1.00 on the increased likelihood the option will be in-the-money at expiration.
- With an increase in implied volatility, δ gravitates toward .50 as more and more strikes are now considered possibilities for winding up in-the-money because of the perceived potential for movement in the underlying.
- Low implied volatility stocks will tend to have higher δ for the in-the-money options and lower δ for out-of-the-money options.
- At expiration an option either has a δ of either 0 or 1.00 with no time premium remaining.
- As expiration nears, in-the-money call δs increase toward 1.00, at-the-money call δs remain around .50 and out-of-the-money call δs fall toward 0 provided other inputs remain constant.
Delta in action: March 2014 NIFTY Options Since Jan
First, lets look at the underlying:
To capture the full move of the NIFTY, you’ll have to look at, at least, a dozen strikes between 5950 and 6900.
δ of calls:
δ of puts:
Note how δs rip towards 0 or 1 as expiry approaches? Here’s an important intuition: in-the-money options will move more than out-of-the-money options, and short-term options will react more than longer-term options to the same price change in the stock.
Source: Understanding Delta
Related articles
- Forensics: NIFTY Options – Theta(θ) Decay
- Forensics: NIFTY Options (stockviz.biz)
- The One Man Insurance Company (stockviz.biz)
- USDINR Implied Vol vs. Realized Vol (stockviz.biz)
Comments are closed, but trackbacks and pingbacks are open.