Delta is my personal favorite “Greek” when looking for options. I would bet that it’s other traders favorite as well… and for good reason! It is how much you will make (or lose) for a 1 point gain (or loss) in the underlying.
Here is a screenshot from my TD Ameritrade account option chain. This chain is for SPY – the S&P 500 ETF I trade frequently.
The yellow highlighted rectangle is showing you the call delta’s for any given strike price. This particular chain is for October 25, 2019 expiration. So, what do those numbers mean? I’ll tell you…
Let’s use the 295 strike price. I have highlighted the option in question above.
This strike price, for this call option, on this particular expiration date (October 25,2019) has a delta of .51. This tells you that for every $1 SPY moves up, or down, you will gain or lose .51 cents PER CONTRACT. Don’t forget: 1 contract is 100 shares of the underlying. So, for every 1 contract, you would gain or lose $51. Let’s do the math…
Let’s say SPY moves up $1, and I own 1 contract of this call option. To calculate how much the price of my contract will move up, I simply take 100 shares (for the 1 contract I own), and multiply it by the delta which is .51… the answer equals 51, or $51 dollars. It means, if I bought the contract for $5, it would now be worth $5.51. All other “things” being equal of course.
Of course, if SPY fell $1, I would have lost $51 on my option price. I would be in the hole $51. The equation to determine that $51 is the same, but the direction the option price moved is different.
Delta is the price in which the option price will fluctuate for every $1 (1 point) move of the underlying. In this case, the underlying is SPY. Notice, the delta is less and less the farther “out of the money” the option is. It gets closer and closer to an even 1 for 1 the farther “in the money” the option is. Right “at the money,” like this option I hypothetically bought, the delta will be around .50. But delta is ALWAYS between 0 and 1.
Keep in mind,there are other Greeks in options (theta, vega, gamma) that influence the price of an option. But all else remaining equal, delta is simply the price fluctuation of the underlying based on a 1 point move (up or down) of the underlying.