There are many factors that affect the value of an option. These include underlying product volatility on which the option is written, the time until the option expires and the expected interest rate or yield curve that will prevail during the life of the option. But the most important component of the value of an option in most cases, the underlying value of the product. After all, an option contract is a derivative, which essentially means that derives its value elsewhere.
Usually, the options are theoretically evaluated using mathematical models. Now the operator of derivatives, the risk associated with a portfolio of options or options is one or more of the variables that affect the change in value. For example, the underlying product may become more volatile or time itself can sculpt the value of the option. Delta is the risk to the value of an option associated with a change in the underlying commodity price. Specifically, we define the delta value as the option of changing to a change in the underlying commodity price.
Understanding delta is clearly crucial for the options a trader. Although it can be easily covered in the first place (replacing the underlying product in the size and the right direction), understanding how changing delta and is itself affected by the circumstances change, it is an essential skill for all options trader.
What determines and affects the delta option?
A call will have a positive delta, while a station will have a negative delta. It is therefore clear that if the price of the underlying product increases, the option becomes more valuable; then call deltas are positive. And vice versa for puts whose deltas must be negative. In practice, it is rare to hear the "negative" fell for convenience; the delta put option is reported in absolute terms, with the negative is implied.
After delta sign (positive for calls, negative for puts) the next most important factor is the price of the product compared to the exercise price of the underlying option. A call option whose strike is below the current price of the underlying product is called deeply in the money. In this case, any change in the price of the underlying product will be reflected almost perfectly with the change in value purchase option. If the underlying increases in value-say $ 101, the call should go up to US $ 10 to $ 91; increasing the value for reflecting a delta of 100%. The same is true for put options whose strike is considerably higher than the underlying price. A $ 200 exercise station will also have a delta of (-) 100%.
When an option is a long way out-of-the-money, its delta will be close to zero. A small change in the price of the underlying stock is unlikely to affect some option value as your chances of winning in the currency is little changed. While Delta is very low for these options.
For options whose attacks are closer underlying, things are a little more interesting. The option whose strike is very close to the underlying product prices will have a delta that approaches 50%. This is not only because the purchase currency is halfway between the deep option option in the currency (100% delta) of the off-the-money option deep (with 0% delta) and also because the chances of the option expires in the money are almost half. Delta option is affected by longevity option. The most dated option has time on his side and can still become valuable. Thus, a change in the underlying product prices will have a greater impact on the value of the oldest option that a shorter dated option of the same strike.
Implied volatility is also a key factor in terms delta. The more volatile product should be on the term of the option, the more chance the option has of winning in the currency and more, so that Delta will (in absolute terms).
The importance of the delta for options traders
Delta can be interpreted as the equivalent exposure in the underlying product to price changes, from Portfolio options. In other words, if my stock option portfolio ABCD shows a combined delta of 50, so I'm synthetically long 50 ABCD shares. The position becomes what is called delta neutral.
While the actions of delta is immutable (the delta of a share relative to itself is always one), the Delta portfolio of options varies considerably over time, changes in implied volatility and changes underlying itself. The risk is increased.
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