Meaning of the term Delta in Stock market
In the stock market, delta is a term used to describe the rate of change in the price of an option contract relative to the underlying asset. It is a key measure of an option’s sensitivity to changes in the price of the underlying stock or other security.
Delta is expressed as a number between 0 and 1 for call options, and between 0 and -1 for put options. A call option with a delta of 0.5, for example, would be expected to increase in value by $0.50 for every $1 increase in the price of the underlying stock. Similarly, a put option with a delta of -0.5 would be expected to decrease in value by $0.50 for every $1 increase in the price of the underlying stock.
Delta is an important measure for options traders, as it helps them to manage their portfolio risk and make informed trading decisions. Options with higher deltas are more sensitive to changes in the price of the underlying asset and therefore offer greater potential for profit or loss.
Delta is also used in option pricing models, such as the Black-Scholes model, to calculate the fair value of an option contract. The delta of an option is one of the variables used in these models to determine the price of the option.
It’s important to note that delta is not a static measure and can change over time as the price of the underlying asset changes or as the option approaches its expiration date. As such, options traders must continuously monitor the delta of their positions and adjust their strategies accordingly.
