All you need to know about Delta in selecting stock option
Author: Libord Brokerage Pvt. Ltd Posted on 02 Aug 2023 15:30:32Category : Knowledge Center
Delta is a measure used in options trading that tells us how much the option's price will change in relation to a one-point movement in the underlying stock or asset. It is essential in selecting the right options to buy or sell, as it helps us gauge the sensitivity of the option to the changes in the underlying asset's price.
Here are the key points to understand about Delta and its practical use:
- Delta ranges between 0 to 1 for call options and 0 to -1 for put options. A call option with a Delta of 1 means it will move in sync with the underlying stock, increasing by Rs 1 if the stock price rises by Rs 1. A put option with a Delta of -1 means it will move in the opposite direction of the underlying stock, decreasing by Rs 1 if the stock price rises by Rs 1.
- Delta is also associated with the approximate probability of an option expiring in profit on the day of expiry. For call options, higher Delta values indicate a higher probability of expiring in profit, while for put options, lower Delta values indicate a higher probability of expiring in profit.
- When buying options, it is generally more favourable to choose options with Delta values around 0.4. These options tend to strike a good balance between affordability (cheaper premiums) and potential returns.
- For selling options, the aim is to choose options with lower probabilities of expiring in profit, which translates to lower Delta values. Options with Delta around 0.25 are often considered suitable for sellers seeking a reasonably lower probability of loss.
- Delta can act as a safeguard against market volatility. For highly volatile stocks, the option with a particular Delta value may be located far from the current market price, whereas for less volatile stocks, it could be closer.
In summary, Delta is a vital tool in options trading, helping traders make informed decisions about strike selection and manage risk effectively. Understanding Delta can aid in maximizing potential profits when buying options and minimizing risks when selling options.