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Using the Delta option

The Delta is a very important Greek in the option world.  It can tell you what to expect when trading options.  How much you should expect to make if you are right and how much you should expect to lose if you are wrong.

                The Delta is a very important Greek in the option world.  It can tell you what to expect when trading options.  How much you should expect to make if you are right and how much you should expect to lose if you are wrong.

                Most people get confused when they think about options.  They expect to see an option move $1 for every $1 the stock moves.  This is not true because of how options are built.  There are multiple different factors that go into the pricing of an option, not just the price of a stock.

                The Delta gives an option trader the best estimate on how much an option will move for every $1 move in the stock.  For example if you have a $5 option with a Delta of $.5 you would expect the option to move $.5 for every $1 move the stock makes.   So if the stock moves $3Find Article, you would expect the option to be trading around $6.5. 

                Delta should be calculated with Gamma to get a more accurate estimate.   Gamma is basically an add on to Delta.  The Gamma measures how much Delta will move for every $1 move in a given stock.  So if the gamma is $.02 you would expect the delta to move $.02 for every $1 move in the stock.

                Knowing Gamma can give you a more accurate estimate of the option price.  For example if a stock moves up $10. The option has a Delta of $.5 and a Gamma of $.02 it does not move up $5 ($.5*10).  The stock should move up $.5+.52+.54….. or $5.9.

This Greek works best for long term options which have little time decay associated with them.  The Delta becomes less accurate when it is only a month or two away from expiration because the time value of an option is decaying at a faster rate.

These are just two different Option Greeks you can use to calculate the price of an option.

To learn more about the option Greeks visit http://www.stocks-simplified.com/option-greeks.html

To learn more about the stock market visit http://www.stocks-simplified.com

Source: Free Articles from ArticlesFactory.com

ABOUT THE AUTHOR


When I was young I wanted to learn how to trade the stock market.  So I traveled around the country listening to professional traders talk about how they are making money in the market.  After trading for a while I understand how easy it is to make money in the stock market and started a site http://www.stocks-simplified.com to help others learn.



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