How does Delta Impact Options Pricing?
When it comes to options trading, understanding the role of delta is crucial. Delta measures the rate at which the price of an option will move in relation to the price movement of the underlying asset. It is one of the Greek letters used to quantify various risk factors associated with options.
What is Delta?
Delta is a key component of options pricing. It represents the sensitivity of an option’s price to changes in the price of the underlying asset. Delta is expressed as a numerical value between -1 and 1, depending on whether the option is a call or a put option.
Delta and Call Options
For call options, delta ranges from 0 to 1. A delta of 0 means the call option has no value if the underlying asset’s price remains unchanged. A delta of 1 indicates that the call option’s price moves in lockstep with the underlying asset. In other words, a $1 increase in the underlying asset’s price will result in a $1 increase in the call option’s price.
Delta and Put Options
In the case of put options, delta ranges from -1 to 0. A delta of -1 signifies that the put option’s price moves inversely with the underlying asset. For example, if the underlying asset’s price increases by $1, the put option’s price will decrease by $1. On the other hand, a delta of 0 means that the put option has no value if the underlying asset’s price remains unchanged.
By Astrobulls research pvt ltd