Delta (Δ) is one of the options greeks which are collectively used to determine how closely an options or warrants contract will track its underlying market. Specifically, delta is the rate at which the price of an options or warrants contract will move compared to the price of its underlying market. Delta is one of the most often used options greeks.
Calculation
Delta (Δ) is the first derivative of the value (V) of a single or group of options or warrants contracts (S), with respect to the price of the underlying market. Delta is calculated as shown in the above calculation image.
Use In Trading
Delta is the number of points that an options or warrants contract will move for each point of positive movement in the underlying market. Delta is therefore a number between -1.00 and 0.00 for long puts and short calls (short underlying trades), and a number between 0.00 and 1.00 for long calls and short puts (long underlying trades). For example, the price of a long put with a delta of -0.61 will decrease by $0.61 (or € or £, etc.) for every increase of $1.00 (or € or £, etc.) in the price of the underlying market. Delta is often used as a percentage rather than a monetary amount. For example, the price of a long call with a delta of 0.42 will increase 42% of any increase in the price of the underlying market.
An alternative way of considering the delta of a stock options or warrants contract is as a number of shares. In other words, if a stock options contract (which is usually worth one hundred shares) has a delta of 0.77 its value will behave as if it were only worth seventy seven shares. Delta is therefore often used to determine the number of options or warrants contracts that must be traded in order to approximate a specific number of shares. For example, if a trader wants to trade five hundred shares of XYZ using an option with a delta of 0.71, they would need to trade the equivalent of seven hundred and four shares, or seven options contracts (calculated as (500 / 0.71) / 100 = 7).