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Delta

Options involve risk and are not suitable for all investors.
Options involve risk and are not suitable for all investors. Certain requirements must be met to trade options. Before engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the risks involved in investing with options. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options (PDF)" before considering any option transaction. You may also call the Investment Center at 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge.

What is Delta?

Delta is the theoretical estimate of how much an option's value may change given a $1 move UP or DOWN in the underlying security. The Delta values range from -1 to +1, with 0 representing an option where the premium barely moves relative to price changes in the underlying stock.
For illustrative purposes only.
Select to close help pop-up Purchased equities.
Select to close help pop-up Buying a call option contract to establish a new position.
Select to close help pop-up Selling a put option contract to establish a new position.
Select to close help pop-up An investor is in a short position when the investor sells a stock that he or she does not own.
Select to close help pop-up Selling a call option contract to establish a new position.
Select to close help pop-up Buying a put option contract to establish a new position.
Delta is a positive value for long stocksHover to view help pop-upSelect to view help pop-upPurchased equities., long callsHover to view help pop-upSelect to view help pop-upBuying a call option contract to establish a new position. and short putsHover to view help pop-upSelect to view help pop-upSelling a put option contract to establish a new position.. On an individual basis, long stock, long calls and short puts are bullish strategies. Inversely, Delta is a negative value for short stockHover to view help pop-upSelect to view help pop-upAn investor is in a short position when the investor sells a stock that he or she does not own., short callsHover to view help pop-upSelect to view help pop-upSelling a call option contract to establish a new position. and long putsHover to view help pop-upSelect to view help pop-upBuying a put option contract to establish a new position.. On an individual basis, short stock, short calls and long puts are bearish strategies. Delta is +1 for shares of long stock and -1 for shares of short stock. An option's Delta ranges from -1 to +1. The closer an option's Delta is to +1 or -1, the more strongly the option's premium responds to a change in the underlying security.

How is Delta used?

Assess Directional Risk

Bullish strategies have a positive Delta and bearish strategies have a negative Delta. Stocks and each individual leg of an option strategy have their own Delta. The Delta of the contracts and securities can be combined to assess the directional risk of the strategy as a whole. Meaning — the net Deltas will reveal if a strategy or a portfolio is bullish or bearish.
For Example:
Long 100 XYZ equals +1 Delta (Long Stock, Bullish)
Short 1 XYZ call at -.30 Delta (Short Call, Bearish)
Net Delta = +.70 Delta
From a Delta perspective, this strategy is bullish, as demonstrated by a positive net Delta, and would benefit from upward movement of the underlying though to a lesser degree than the long stock position alone.

Assess Traction (Stock Sensitivity)

Select to close help pop-up A call option is in the money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.
Long stocks have a Delta of +1 and short stocks have a Delta of -1. An option's delta ranges from +1 to -1. The deeper an option moves in-the-moneyHover to view help pop-upSelect to view help pop-upA call option is in the money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security., the closer an option's Delta moves toward +1 or -1. An option with a Delta of +1 will move in tandem with the underlying security, it has now begun to act like the stock. Meaning, time value is no longer priced in, regardless of expiration. Essentially, a Delta closer to +1 or -1, means a greater change in the option price when the underlying moves. Therefore, by assessing Delta on an option contract individually or as a net figure from a strategy or portfolio perspective, the sensitivity to the underlying security can be assessed.
For illustrative purposes only.

Assess Probability of In-the-Money at Expiration

Select to close help pop-up The amount by which an option is in-the-money.
An increasing Delta is an indication that the option is becoming more sensitive to the underlying security and ultimately the premium is comprised of mostly intrinsic valueHover to view help pop-upSelect to view help pop-upThe amount by which an option is in-the-money.. For this reason, Delta can be used to assess the market-assigned probability of the option being in-the-money at expiration. Essentially, a Delta closer to +1 or -1 is an indication of greater intrinsic value which can be translated into a higher probability of being in-the-money at expiration — potentially because it already is in-the-money.
For Example:
In-the-money XYZ Call @ .60 Delta = 60% probability of being in-the-money at expiration
At-the-money XYZ Call @ .50 Delta = 50% probability of being in-the-money at expiration
Out-of-the-money XYZ Call @ .30 Delta = 30% probability of being in-the-money at expiration

What are other factors to consider?

Delta is not a constant value and changes as the stock price changes. This change in Delta is measured by another Greek, known as Gamma. Since Delta changes as the stock moves, it is important to remember that Delta will not accurately predict the exact change in the option's premium, especially for larger changes in the stock's price.
Options involve risk and are not suitable for all investors. Certain requirements must be met to trade options. Before engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the risks involved in investing with options. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options (PDF)" before considering any option transaction. You may also call the Investment Center at 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge.
View definitions for investment terms in our Glossary.
For purposes of all the computations discussed in this article, commissions, fees and margin interest and taxes, have not been included in the examples. These costs obviously will impact the outcome of any stock or option transaction. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities. Past performance is not a guarantee of future results.
This material is being provided for informational purposes only. Nothing herein is or should be construed as investment, legal or tax advice, a recommendation of any kind, a solicitation of clients, or an offer to sell or a solicitation of an offer to invest in options. The information herein has been obtained from third-party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed.

Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data will be furnished on request.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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