WORDS BY THOMAS PRESTON
PHOTOGRAPHS BY DAN SAELINGER
BIG IDEA: DELTA IS USUALLY THE
FIRST GREEK OPTION TRADERS
THINK OF AND FOR GOOD REASON.
IT CONTAINS THE INFORMATION
THAT MATTERS MOST WHEN YOU’RE
LOOKING FOR A PROFIT: HOW MUCH
YOU CAN MAKE. BUT THERE’S MORE.
Black-Scholes and delta—they’re kind of a
“which came first, the chicken or the egg”
situation. Delta is a derivative of the Black-
Scholes Option Pricing Model, so you’d think
Black-Scholes came first. But delta is also a key
part of the Black-Scholes equation, so maybe
delta did come first. Even the chicken could be
scratching her head on this one.
Either way, delta is the most critical “greek” when it comes to options
trading. The stock price is the main determinant of whether an options trade
is profitable or not, and delta is the metric that tells you how much the price of
an option may theoretically respond to changes in the stock price (see Figure 1).
Sure, the other greeks (like vega and theta) are important, and we covered those
in the previous two issues. But it’s delta that tells you where most of your risk and
potential opportunity lie.
DELTA WORKS IN MYS TERIOUS WAYS
Say FAHN is trading for $140 per share. The September 145 call has a theoretical value
of $3.80 and a delta of 0.39. If the stock price rises from $140 to $141, theoretically the
145 call will go up from $3.80 to $4.19, all other things (like time and volatility) being
equal. If FAHN drops from $140 to $139, theoretically the 145 call will drop from $3.80 to
$3.41. So, delta is the theoretical measure of how much the price of an option will change
when the underlying stock, index, or futures changes $1.
Keep an eye on
delta to monitor
your position’s risk.