Using Option Greeks—Delta

09/17/2008 12:00 am EST

Focus: OPTIONS

John Jagerson

Co-Founder and Contributor, LearningMarkets.com

Option greeks can be useful in your trading. Understanding how they work can provide the kind of information you need to more accurately forecast prices as well as improve your position sizing. The greeks are measures of the sensitivity of an particular option to underlying forces including stock price changes, volatility, supply and demand, interest rates, and the passage of time. In this video, we will start the discussion for one of these greeks: delta. This is the most often quoted greek, and traders tend to pay attention to it as a way to forecast option price changes.

Delta is a measure of how much an option's price is likely to change for a $1 move in the price of the underlying stock. For example, if delta for an at the money option is $.50 then we would assume that the option's price will increase $.50 or $50 per contract for a $1 move up in the underlying stock. As you move further out of the money, the price of the option shrinks and so does delta. As you move further in the money, the price of an option grows and so does delta. An in the money option is likely to move more in absolute dollar terms per $1 move in the stock than at the money or out of the money options with smaller deltas.

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