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Delta - A Timing Device For Options Trading

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Among the "Greeks" the most valuable for options trading (and specifically for timing of trades) is the delta.

This indicator compares likely change in option value relative to change in the value of the underlying. The higher the delta level, the more likely the premium will move more than movement in the same direction for the underlying. And of course, a lower delta reveals a less responsive likely reaction among option contracts, to movement in the underlying.

Because delta measures reaction of premium to underlying, it can be viewed as a reliable test of extrinsic value (implied volatility). Because of this, as you would expect, the delta strength or weakness is going to vary based on two factors: proximity of strike to current underlying price, and time remaining until expiration. The closer underlying price is to strike, the m ore responsively you expect IV to behave. The same is true for time to expiration; very long-term options are going to be less responsible than those closer to expiration. However, these two factors - time and proximity - interact to define the delta level.

The range of delta varies between a high of +1 and a low of -1. Call delta is always expressed as a positive attribute, and put delta is always expressed as a negative. Long call delta is a positive factor if the underlying price is rising, but for short calls, it is a negative factor. For long puts, delta is a negative factor if the underlying price is declining, and for short puts, delta is a positive factor if the underlying price rises.

Calculation of delta is not necessary as several free online calculators are available. The Chicago board Options Exchange (NASDAQ:CBOE) provides free calculations for all of the Greeks. Go to CBOE Option calculator to find CBOE's calculator.

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