Archimedes Finance

Become a better investor

Greeks with Bryce — What is Delta?

What is Delta? How should we think about it?

Review our lesson on Greeks:

By Bryce

What are Greeks?

So greeks really are just kind of a risk management tool and that would be more for like you know experienced traders. Professional traders especially if you have a portfolio like the risk are extremely important. Um but that's not to mean that just the average investor can't use them—they still can be valuable to them if they know how to use them. Right so one there's a risk they're risk measurements and then two they affect how the options change in price right so you have delta, gamma, theta, rho, vega.


What does it mean to be long Delta?

Delta essentially is what your directional risk is so if you're quote-unquote long deltas, you want the stock to go up.


What does it mean to be short Delta?

 If you're short delta you want the stock to go down.


What is Delta?

Delta is your directional risk.


How does Delta compare to the underlying stock?

If you take it to the extreme let's say we're looking at the Airbnb which is trading 172 and a half right so let's say we look at the $105 strike calls at the very top right. So that's saying the delta is a 99.6 delta right so let's let's just say it's a hundred right. And a hundred means it's deep in-the-money it's essentially equivalent to the stock underlying so looking at a P/L graph if stock goes up a dollar you're gonna make a dollar.  Same thing with a 100 delta call if that stock goes up a dollar you're gonna make um it's the same thing as being long 100 shares of stock right.


Um, so if you look at-the-money so if you go to the $172.5. Yeah right so that's a 50 delta right if the stock goes up a dollar and you own stock you're going to make a dollar. If you own the call and stock goes up a dollar you're only going to make 50 cents. It's the equivalent of 50 shares rather than the equivalent of 100 shares.


What does Delta teach us about probabilities?

You can think about it as the probability of finishing in the money and um this might help the newer investors and just a way to kind of help you think about what options you might want to buy. What are the chances that this option will finish in the money.


How can Delta be a rate of change?

It's also the rate of change right. Okay. So if you're looking at any options across any expiration so using the same example right if the stock goes up a dollar and you're long the $105 strike calls which are 100 delta. Those calls will go up a dollar just like stock goes up a dollar. But if you're looking at the 172 calls and those are 50 delta. If the stock goes up a dollar those calls only go up 50 cents right because it's a 50 delta.

At Archimedes, our goal is to make investment literacy accessible and free for everyone.

Join our investment learning hub for more free lessons like this, connect with our trusted community, and get hands-on experience by playing a game!