ES 5-26-17 : Hot Topic

# Delta

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## Definition of 'Delta'

The Delta is the ration that compares a change in the price of an underlying asset to the corresponding change in the price of a derivative. This is also sometimes referred to as a hedge ratio as it allows the trader to apply a ratio to calculate the amount of derivative needed to hedge the underlying (often cash based) asset.

The delta of a future, for example, an index future, is usually 1.0. This means that for every point change in the cash index the future's price will move by the same amount. i.e. a point.

The Delta really comes into play with options. An call option with a delta of 0.4 will change by $0.40 for each $1.00 change in the underlying asset. A put option with a delta of -0.4 will change by $0.40 for each -$1.00 change in the underlying asset. Note how the put option's value only takes a positive change if the value of the underlying asset drops. This is the nature of put options. They increase with value when the asset drops. With a put option you have the right to sell the underlying asset at a fixed price.

As an in-the-money option nears expiration, it's delta will move to 1.0 (for call options) and -1.0 (for put options). This is because the "time value" of the option is no longer being discounted because there is very little time value left in the option.

All the Greeks: Delta, Gamma, Vega, Theta, Vomma

The delta of a future, for example, an index future, is usually 1.0. This means that for every point change in the cash index the future's price will move by the same amount. i.e. a point.

The Delta really comes into play with options. An call option with a delta of 0.4 will change by $0.40 for each $1.00 change in the underlying asset. A put option with a delta of -0.4 will change by $0.40 for each -$1.00 change in the underlying asset. Note how the put option's value only takes a positive change if the value of the underlying asset drops. This is the nature of put options. They increase with value when the asset drops. With a put option you have the right to sell the underlying asset at a fixed price.

As an in-the-money option nears expiration, it's delta will move to 1.0 (for call options) and -1.0 (for put options). This is because the "time value" of the option is no longer being discounted because there is very little time value left in the option.

All the Greeks: Delta, Gamma, Vega, Theta, Vomma

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