Hi Shoppers,

I am pretty sure you are familiar with the term “delta” related to options.

This is just a little refresher.

Theoretically, all things being equal, an option’s delta is how much the option’s price moves as the stock moves.

A 50-delta call moves up $.50 as the stock moves up a dollar, all things being equal.

This is the option’s “moneyness”  meaning where the option’s strike price is in relation to the underlying price.

In the money, for calls. means the strike price is above the underlying price and the delta is above 50.

In-the-money puts have strike prices below the underlying price and the deltas are -51 to -100.

A delta of 100 means the option is stock-like and will move one to one with the stock price.

Calls move in the same direction and puts in the opposite direction.

Out-of-the-money options have deltas lower than 50 and move much less with the stock movement.

Theoretically, a 20-delta put will go up $.20 with a dollar move lower in the stock.

An at-the-money option has a 50 delta with the calls being +50 and the puts being -50.

Delta is very useful for hedging.

Say you buy 100 40 delta calls which makes you 4000 deltas long.

If the stock trades down one dollar, you will lose $4000.

There are several ways to hedge this position to be “delta neutral”.

You can sell 4000 shares of stock, you can buy 4000 put deltas, you can sell 4000 deltas of another call, or any of these combined.

Now I say “theoretically” and “all things being equal” because we have our old friend volatility.

Volatility is the one factor in option pricing that is not constant, it is always changing.

The volatility of the underlying is priced into the options prices and as an underlying’s volatility increases, so will the extra premium priced into the options.

In general, the volatility of the options tends to go down on the upside (when the stock is trading higher) and goes up when the stock trades lower.

As always, nothing is 100% in trading.

Thanks for Reading … See You Next Tuesday,

Licia Leslie