We are hoping this to be an easy and simple lesson to introduce options to you. By following Options Basics' articles, you should be able to understand options and how to utilize options to either profit or protect your stock.
Before we get to all the strategies for options trading, it is a good idea to meet the greeks first. They will affect the price of every option you trade. However, in this part, one thing you have to keep in mind is that the examples we use are "ideal world" examples. In the real world of options trading, things tend not to work quite as perfectly as the "ideal world" we are in when learning about options.
Beginners sometimes assume that when a stock moves $1, the price of its options will move more than $1. That is a very common mistake. The option premium(cost of the option) is much less than the stock. Why should you reap more benefits than if you owned the stock?
The real question is how much will the price of an option move if the stock moves $1? That is what "delta" is for.
Delta is the amount an option price is expected to move based on a $1 change in the underlying stock.
Calls have a positive delta, between 0 and 1. That means if the stock price goes up and no other pricing variables change, the price for the call will go up.
Puts have a negative delta, between 0 and -1. That means if the stock goes up and no other pricing variables change, the price of the option will go down.
As a general rule, in-the-money options will move more than out-of-the-money options, and short-term options will react more than longer-term options to the same price change in the stock.
Everything above would be what you will get from textbooks, but there actually is a simple and useful way to think about delta: the probability an option will wind up at least $.01 in-the-money at expiration.
For example, if an option has a delta of 0.503, this means there is a 50.3% probability that this option will wind up $.01 in-the-money at expiration.
Simple as that!
Below is a screenshot example of where to check delta on Moomoo!