So let's talk about options
Delta. You see option prices
are influenced by what they
call the Greeks.
And the Greeks are Delta,
Gamma, and Theta.
This is just three of the Greeks
there is more.
And you see, when you're trading
options, it is important that you
know about the Greeks and what
they do. And today
we want to focus on
Delta.
I want to show you exactly what
Delta is.
And then we'll go through a specific
example and I'll show you a few
things that you need to know about
Delta. So let's get started.
OK. There are the option Greek.
So Delta is actually
measuring the sensitivity,
and it's a mouthful I'll show you
exactly what it means, of options
premium relatively to
the underlying asset.
And what the heck does all of this
mean? You'll see in just a moment
don't worry about it.
So in a nutshell, it basically
says, how much does
the option price change
if the stock moves
$1 to the upside or the downside?
Now, Gamma is the rate
of change of the Delta,
and we don't want to worry about
that today because we want to
focus on Delta.
What is it? What does it do?
Why do you need this?
Why is it important to know about
Delta? And then we have
Theta, and Theta basically
measures the so-called
time decay.
Now, I already did a video on
Theta, so if you would like to know
more about Theta I'll link to this
video in the description,
right? But let's focus on Delta.
So what is
Delta? So Delta is
a number between 0 and
1 that measures
how much the price of
an option changes
if the stock moves by
$1. And again, all of this sounds
super, super theoretical.
So let me actually show
you a very, very specific
example.
Now, the example that I want
to use here is Microsoft.
I mean, it doesn't really matter
what we use, but I want to show
you right now, Microsoft is trading
at $211.20.
And now I want to show you different
strike prices of options,
because, again, options have strike
prices and expirations.
If you're brand new to options and
don't know even about strike prices
I did a video series, a playlist
on Options 101 I'll link
it in the playlist here.
So we'll also look at a different
Delta. We are looking at
the current price of that
option and we will look
at the new price of this option
if Microsoft moves
by $1 from $211.20
to $212.20.
OK, so we're bringing up an option
chain. I want to bring up an option
chain of next week.
And you see, this is where we are
expiring November 27th.
This is the trading platform that I
use. It's called TastyWorks, if
you would like to know more about
tastyworks I'll link to it in the
descriptions as well.
So as you can see, there are
different call options on this
site with different strike prices.
And you can see that they have
all sorts of different Deltas.
I'm displaying the Delta here.
So let's get started with the 205
that is right now trading at
$7.25, the Delta is
0.8. So what does it mean?
So we are looking at the 205
strike. The Delta is
0.8 because again, the Delta is
between 0 and 1.
I'll tell you about negative Delta
in just a moment.
The current price of the option
is what we are seeing right here.
We look at the last traded price,
the last traded price is
$6.92.
So $6.92.
So what does it mean?
It means if Microsoft goes up by
$1 to $212.20,
that the new price is
$6.92 plus the
Delta. So, you see this where
it's really important that you
understand Delta.
Some people think that options
move even more than
the stock. And oh boy, this is not
true at all.
So option prices always
move less than the
stock price. And this
is what the Delta tells
you. So the new price here
of the option would then be
$7.72.
OK. So this is for a strike price
of 205.
And this is a strike price that is
so-called ITM,
in the money.
Because its value,
its strike is less than
the current price.
Now let's take a look at a strike
that is at the money.
And you see right now it's a little
bit tricky because Microsoft is
trading at $211.
So let's just use the
210 strike price here.
As you can see, the 210 strike
price has a Delta of
0.57.
So let's write this down 210,
and this would be a so-called
at the money with a Delta
of 0.57.
Again, it is between 0 and 1.
The current price of the 210
strike here is
$3.05. We are using the last traded
price here.
So if Microsoft moves
by $1 upwards, this
option only moves
0.57.
So this means that this option moves
to $3.62.
Are you getting the hang on it?
Wanna do one more example?
If you're enjoying this and you want
to do one more example, do me a
favor click on like right now.
So here we are now using
a strike that is out of the money.
So we are using a strike of
215.
So that would be out of the money.
And the Delta is
0.27. So the current price
of this option is
$1.06. And so if the stock
moves up by a dollar, this
option only moves
up by $0.27.
So even though the stock moves by a
$1, this only moves
to $1.33.
Did I do the math right?
OK. So first of all, let's
talk about the things you need to
know. Options that are
in the money have
a higher Delta then options
out of the money.
So this means that in the money
options behave more than a
stock. Now, if you go back to our
options chain here, you see that
the Delta for deep, deep,
deep in the money options
is 0.98.
So this basically means that
this option, if the stock
goes up by $1, this
option goes up by $0.98.
So the deeper in the money, the
closer to 1.
But also, this is where you see the
relationship here, right?
Options that are ITM
are more expensive,
right? So this is where it's
important that you see that there's
a relationship between the Delta
and the price.
The higher the Delta, the higher
the price, because the higher the
Delta, the more it
is in the money.
So typically options
at the money, which are right where
the strike price is, right at
the level where the current price
is, are usually around
0.5. So this is just as
a rule of thumb.
Now, you might also see this is
where we just talked about call
options. Now put options
have a negative Delta
which is between -1
and 0, because what does it mean?
Well, the price of a put
decreases if
the option goes up.
So this is why when we go over
here, you see that the Delta
for put options is all
negative.
Now, put options that are in
the money, this is where you see it
right here, are usually closer
to one. And options that are out of
the money, they don't move a
whole lot. So this is very important
because some people just think, "Oh,
my gosh, I'm buying out of
the money options because they are
cheap. It is so much cheaper
to pay $1.6 than
$6.92." But as you can see,
it's not really moving a whole lot.
And the further out of the money you
buy, see if you want to buy a
really, really cheap one of
let's say here for only $31,
then you see that the Delta is only
$0.10.
So it doesn't really move
a whole lot.
For every $1 that the stock moves,
this option only moves $0.10.
OK. What else you need to know, and
now I want to show you a really cool
trick that you might not have
known, because the Delta
is a rough estimate of
the probability of
the stock price closing
above the strike.
Did you know that? Now, if you have
been trading options you probably
knew this. So here, you see with a
delta of 0.8, it means
that there's an 80%
probability right now
that the stock will be above
205. There's a 27%
probability that the stock
will be above 215.
So I think it's kind of cool as
an option trader to know this.
So the Delta is giving you a rough
approximation of how likely
is it that the stock will be above
or below the current strike
price on exploration.
Now here is a tricky
thing. The Delta is
not fixed.
So the Delta changes
as the price changes
and here's why.
Because right now, if, for example,
Microsoft goes up to 215,
the current strike price of 210
is deeper in the money therefore,
the Delta will be higher.
Anyhow, so
now you know what Delta is, how
it influences the option price, and
you see that this is important
when you are trading options.
So let me ask you, all of this that
you have seen here, is is this
helpful at all and would you like to
see more videos like this?
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