Delta
Description
The Delta measure describes how the value of an option changes as a result of small changes in the underlying asset, assuming that all the other factors influencing option pricing are constant. The delta of an option can also be viewed as the required hedge for the option against changes in the underlying spot, i.e. the position in the spot which ensures that the Profit/Loss on the option is offset by the Profit/Loss on the spot position. For each options position, the table below indicates the direction, i.e. whether to buy or sell, of the hedge position in the spot.
Technical Description
The first derivative of the option price with respect to the underlying asset (i.e. the slope of the option's price-curve at the spot rate).
Position |
Long Call |
Long Put |
Short Call |
Short Put |
Hedge (in spot) |
Sell |
Buy |
Buy |
Sell |
Example Call
If an investor buys a 40 Delta EUR/USD Call for one million, he/she can hedge this position by selling 400,000 in the underlying asset - i.e. the spot. Alternatively, if the investor had bought a 30 Delta EUR/USD Call he/she would have to sell 300,000 in the spot market to become delta neutral.
Example Put
If the investor buys a 55 Delta EUR/USD Put for 1.000.000, he/she would have to buy 550.000 in the spot market. Alternatively, if the investor sells the Put, the corresponding hedge would be a short position in the spot market, as indicated in the table above.