What is delta?
Delta is a ratio that shows how much the price of a derivative is likely to move based on the price change of an underlying asset.
Investors use delta to predict the movement of derivatives and understand the risks of their investments.
Where have you heard about delta?
Also known as hedge ratio, delta is one of four statistics that measure and analyse factors influencing an option's price, known as 'Greeks'.
What you need to know about delta...
The delta ratio calculates how a change in one variable (the underlying asset) impacts the other (the price of a derivative). This derivative is usually an option but the principle can be applied elsewhere.
When trading options, knowing the delta value is a vital tool. The figure is calculated through multiple variables, including but not limited to, time remaining until expiration, option strike price and stock price.
Call options always have a positive delta value and range from 0.0 to 1.0. Put options always have a negative delta value and range from 0.0 to -1.0.
Here's an example of how the delta ratio works:
A call option for a share has a delta value of 0.4. This means a $1 change in the price of the stock is equal to a $0.40 change in the price of a call option.