If you have been even remotely interested in options trading, you would probably have heard of the options greeks, and seen those weird symbols that you thought should only belong in a Science or Math textbook…. So, what exactly are those greeks? In this post, I’m going to briefly introduce the options greeks and talk about one of my favourite greeks: Delta.

Simply stated, greeks are just measurements that help us estimate how the price of an option will change in response to changes in the underlying stock price, interest rate, volatility and time passing.

The table below shows the five options greeks… and what they measure:

Options Greeks

The best way to explain is through an example… In this post, I’ll concentrate on the delta, leaving the other greeks for my future posts….

The chart shows the deltas for AAPL Nov 09 Options… The current price of AAPL is $184…

Delta

The left side of the chart shows the Call Options… Look at the row that is highlighted… It shows that the Nov 09 AAPL CALL option, with a strike price of $190, has a delta of 0.45. What this means is that when AAPL’s stock price increases by $1 (with all things being equal), the $190 Call option will rise by $0.45. Since the current bid price of the option is $8.50, we’ll expect the price to rise to $8.95 when the AAPL stock increases by $1.

In contrast, look at the Put Options on the right of the chart… We can see that all the deltas are negative… Look at the row that is highlighted… It shows that the Nov 09 AAPL PUT option, with a strike price of $150, has a delta of -0.10. What this means is that when AAPL’s stock price increases by $1, the Put $150 option will increase by -$0.10 (in other words, fall by $0.10). Since the current bid price of the option is $1.61, we’ll expect the price to fall to $1.51 when the AAPL stock increases by $1.

There are a few things to highlight about an option’s delta

1. CALL options will always have positive deltas while PUT options will have negative deltas (i.e. their value decreases when the underlying stock price increases)
2. An option’s delta does not stay the same throughout its lifetime.. The $190 CALL option, that currently has a delta of $0.45, will have a different delta as the stock price changes. For instance, if AAPL suddenly plunges to $100, we’ll expect the delta of the $190 CALL option to drastically decrease…
3. The absolute value of a delta can also be viewed as the probability of the option expiring in-the-money…You’ll notice that for CALL options, the $130 option has a delta of 0.97.. This means that the option price will increase by $0.97 for every $1 increase in the stock price… It also means that there is a 97% chance that the option will expire in-the-money.. In other words, it is almost a certainty that the option will expire in-the-money… (That makes sense, since the option is already so deeply in-the-money at present…)In contrast, the $260 Call option has a delta of 0.02, indicating a 2% chance of expiring in-the-money. That is because $260 is very far from the current stock price (which is about $184).. so it is almost impossible for the $260 option to finish in-the-money…