Option delta is one of the option greeks. These statistics describe the sensitivity of option prices to various market influences, such as changes in price and volatility. Option delta provides investors with a method of calculating future market prices for options based on projected changes in the underlying market.
1. Identify the price of the underlying asset. If you are trading an option on a stock, this is the current share price of the stock.
2. Anticipate a future market move. Since option delta relates to changes in the underlying stock price, you must have a forecast on the stock price in order to calculate a future market value for the option. For example, if a stock is currently trading at $15 and you anticipate a move to $16, you are forecasting a $1 price move.
3. Calculate or look up option delta. The formula for option delta is part of the Black-Scholes model for calculating option value. The actual formula is relatively complex, so the easiest way to determine option delta is to look it up in an option table. Option delta identifies how much the option price will change in relation to a change in the stock price. For example, a delta of .5 means that the option price will move $0.50 in response to a $1 move in the stock market. A delta of 1 indicates that option price movements will match stock price movements.
4. Calculate the expected market value of the option using the current option price, option delta, current market price and the anticipated market price move. For example, assume you hold a call option on a stock trading at $15 and you expect the stock to rise to $16. The option is currently worth $5 and it has a delta of .5. Therefore, if the expected move happens, the option price will increase by $0.50 and the market value of the option will be $5.50.
- To understand option prices in depth, research the other option greeks.
Items you will need
- Option table
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