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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT Press); and "Options for... More
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  • Delta As A Signal For Timing Entry And Exit 4 comments
    May 16, 2013 9:48 AM

    You may be familiar with the "Greeks" of option trading, the various indicators that describe option premium and risk levels. Among the Greeks, delta may be the most important and the one giving information that could be the most profitable.

    Delta measures how option premium is expected to change with changes in the underlying stock's price. A higher delta tells you that option premium is likely to rise more in relation to rises in the stock price, just as a lower delta tells you the option will be less responsive. Delta may be thought of as a measure of extrinsic value, the third kind of value excluding extrinsic and time value. Extrinsic value is also the degree of implied volatility, and this is what delta is really all about.

    Delta may be positive or negative, and overall delta is going to range somewhere between +1 and -1. A call has a positive delta, and a put has a negative delta because put premium increases when stock prices fall, and vice versa.

    As you would expect, delta levels rise when a call gets closer to the money and then moves in the money (or for a put, the negative value increases). The delta is also likely to decline if the option moves further out of the money.

    The proximity of the strike to current value of the stock is a primary influence of the delta. The second factor is time to expiration. When there is less time remaining, the odds that an option will remain in its "money state" (in or out of the money) also grows. So the closer the option is to expiration, the higher the delta for in-the-money and the lower the delta for out-of-the-money positions.

    Recognizing the status of an option in terms of proximity between strike and current value, and also observing how that changes with time to expiration, is the starting point in determining whether an option's current premium level is reasonable. However, the real value to delta is found in noting how rapidly (or slowly) delta tends to change. As a rule, the delta tends to increase as it gets further in or out of the money (this acceleration is yet another Greek called gamma).

    The rate of change is affected by proximity and time, and delta normally reflects this change. So an in-the-money call with a delta of 1.0 has a high likelihood of expiring in the money; in comparison, a call with a delta at or close to 0.0 has a very low probability of expiring in the money and is far more likely to close out of the money. Expanding this logic, delta of 0.5 indicates a 50% probability of being in the money at expiration.

    The basic rule of delta remains:

    - for long calls, delta is positive when the stock price rises.

    - for short calls, delta is negative when the stock price falls.

    - for long puts, delta is negative when the stock price falls.

    - for short puts, delta is positive when the stock price rises.
    Calculating delta and other Greeks is not difficult, especially given the numerous free online calculators traders can use. One of the best is provided free of change by the Chicago Board Options Exchange (NASDAQ:CBOE), where you can estimate all of the Greeks for any kind of long or short option. Go to CBOE Calculator

    To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at to learn more. As a new member, if you buy a one-year subscription, you also get a free copy of one of my books, including this new one just released.

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Comments (4)
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  • howrad
    , contributor
    Comments (17) | Send Message
    I would be interested in hearing about the application of delta for timing entry and exit. How does one apply the signal?
    18 May 2013, 10:14 AM Reply Like
  • Thomsett
    , contributor
    Comments (198) | Send Message
    Author’s reply » When delta is high you would expect the option to move more rapidly than the underlying p0rice, and when low it would be less responsive.
    19 May 2013, 11:35 AM Reply Like
  • howrad
    , contributor
    Comments (17) | Send Message
    thank you
    25 May 2013, 09:41 AM Reply Like
  • crconlan0205
    , contributor
    Comments (2) | Send Message
    Delta is not a measure of extrinsic value. It is the literal measure of change in options premium per change in stock price. Stocks more in-the-money, that therefore have less extrinsic value/premium, will have higher absolute values of delta (due to the large proportion of intrinsic/extrinsic value). Delta is more important to risk-preference than entry triggers. Measuring delta/premium of the option is a useful way to estimate percent returns on a dollar change in the stock price.
    20 Jun 2013, 03:29 AM Reply Like
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