Options are considered highly risky.
We generally use Greek letters to measure an option's risk, including delta, gamma, theta, vega, and rho.
Also known as the "hedge ratio", delta measures the change in an option's price brought by a change in the price of the underlying security.
Delta = (O2 – O1) / (P2 – P1)*
*O1—Initial price of the option
O2—Current price of the option
P1—Initial price of the underlying security
P2—Current price of the underlying security
Call options have a positive delta, while put options have a negative delta.
The value of delta ranges from –1 to 1.
It’s your actual position that determines whether the option's delta is positive or negative.
Position Call Put
Long + –
Short – +
Suppose the stock price of Company A is US$100 per share, the price of a call option is US$1, and its delta is 0.4.
When Company A's stock price grows from US$100 to US$102, up US$2, the change in the option's price will be US$2 * 0.4 = US$0.8, i.e., the option's new price will be US$1.8.
Yet delta can do more than just measure the option's price change—its absolute value can indicate the probability for the option to expire in-the-money.
For example, a call option with a delta of 0.2 has a 20% chance of ending up in-the-money.
