Delta is the most common of all the Greeks and is sometimes referred to as the Hedge Ratio Factor. Delta is generally defined as referring to the rate of change that an option will move in relationship to the underlying security. Long Call Options always have a positive delta. This is because their prices increase as the stock price increases and decreases as the stock declines. Long put options always have a negative delta because the put option price will decrease as the stock price increases, and will increase as the stock price declines. An equity put struck at-the-money would have a negative delta of 50. If we exercise the put, we will end up being short the stock. Similarly, shorting a call implies a negative delta and shorting a put implies a positive delta.

A strategy may involve one or more options in combination with the underlying security. An easy way of evaluating the basic outlook of the strategy is to determine the net deltas of all the options and the underlying security that make up the strategy. This net number is called the position delta. A position with a positive delta would tend to be bullish and a position with a negative delta would tend to be bearish.

A position with little or no delta, also known as “flat delta”, would tend to be neutral as to stock direction. The measurement of how much an option’s price is expected to change for a $1 change in the price of the underlying stock. Each share of stock always has a delta of 1. So, if an option has a delta of 75, you have an option that will move .75 of a point for every 1 point move in the underlying index. First, every call option has a delta that ranges from 0 to 100. Second, every put option has a delta that ranges from 0 to -100. This percentage difference is very important to understand as a buyer or seller of calls or puts.

Many traders become very frustrated because the options they purchase do not move in tandem with the underlying index. They feel for some reason if the index moves 20 points, at-the-money options should also move 20 points. Unfortunately, a lot of this frustration is due to a lack of understanding of how delta functions in the purchase or selling of options. The closer to at-the- money the option is to the underlying security, the closer the deltas are to 50 or in other words, they will move 0.5 point for every full point move in the security. Hence, the deeper in the money the optio n the greater its delta, hence the greater the move in relationship to the security. An option deep in the money could have a delta of 85%-95% in relationship to the security. Eventually an option could become so deep in the money that it could have a delta almost at 100. However, we all know that options have time value associated with them so it is most unlikely that any option in reality will have an absolute 100 delta in relationship to the security.

This article will help you to understand binary options. Your binary options education will continue.