Question

What is an option delta? If delta is 0.5 what does this mean? How does delta change when the option is in-the-money, at-the-money, and out-of-the-money

Answer 1

The option's delta is the rate of change of the price of the option with respect to its underlying security's price. The delta of an option ranges in value from 0 to 1 for calls (0 to -1 for puts) and reflects the increase or decrease in the price of the option in response to a 1 point movement of the underlying asset price.

If an at-the-money call option has a delta value of approximately 0.5- which means that there is a 50% chance the option will end in the money and a 50% chance it will end out of the money.

Delta tends to increase as you get closer to expiration for near or at-the-money options. An ITM call will approach a delta of 1 as it gets closer to expiry, since the extrinsic value is minimal, and the intrinsic value has a delta of 1. Likewise, an OTM call will approach a delta of 0 as it gets close to expiry, since the intrinsic value has a delta of 0. Conversely, the further out to expiry, the close the delta of a call will get to 0.5. This is because we are less certain if the call will be ITM or OTM.

ITM = In the money

OTM = Out of the money