Measuring Directional Exposure with Delta: Single Option and Option Spreads

Delta as a measure of directional exposure

The relationship between the underlying stock’s price changes and the option’s price changes is measured by the well known Greek letter delta. In general, delta measures by how much the value (market price) of an option or an option spread position changes when the market price of the underlying asset (e.g. a stock) changes by 1 dollar. You can see a more detailed introduction to delta here: Option Delta.

Besides individual options, delta can be used to measure the directional exposure of whole option spreads or other positions combining multiple options on the same underlying asset.

Delta of call options

For call options delta can reach values from zero (far out of the money options) to one (deep in the money options). At the money options have delta around 0.50. This means that when the underlying stock increases by 1 dollar, the option’s market price rises by 50 cents.

Delta of put options

For put options delta has values between negative one (deep in the money puts) and zero (far out of the money puts). At the money put options have delta around -0.50. When the underlying stock decreases by 1 dollar, the put option’s market price rises by 50 cents (same as with calls, just inverse).

Measuring directional exposure of option spreads

Options’ delta is additive and therefore it is an effective tool for measuring directional exposure also for more complicated option spreads and combinations of multiple options. You simply add all deltas of your long options and subtract all deltas of your short options and the result is the total delta of your position. You can see an example here: Delta Hedging.

Bullish and bearish option spreads and delta

If the total delta is positive, you have bullish exposure to the underlying asset (you make a profit when the price of the underlying asset rises). If it is negative, you are bearish (you profit from decline of the underlying asset’s price). Unlike the delta of a single option, the total delta can be higher than one or lower than minus one for combinations of multiple options.

Related pages

what happens when you square a negative numberlong straddle optionsdefine backwardationexcel calculation formula13f sec filingdescriptive stats in excelcboe trading hoursvariance function excellist of inverse etfswhat is sampling variationmedian advantages and disadvantagesyahoo finance vixshort strangle calculatorarithmetic mean formulashow to read the vixvega black scholesdow weightings&p 500 futures bloombergpopulation variance and sample variancehow to calculate root in excelblack scholes option calculatorwhat does macd stand forhow to interpret sharpe rationatural log in excelaverage equation for excels&p 500 historical valuesblack scholes equatione-tracsstandard deviation of the sample mean formulauses of arithmetic mean in daily life13f sec filingshedge fund forex strategycorrelation etflatest 13f filingsprice weighted indexcalculating the sample varianceconvert standard deviation to variancevix cboe volatility indexcall option intrinsic valuedelta of put optionwhat does overbought and oversold meanpayoff of call optionexcel 2007 standard deviationkurtosis valueswarren buffett 13fvix index cboemsft share price historysimple exponential smoothing calculatorhow to trade vixwilder rsioption theta calculators&p 500 settlement priceblack and scholes formulahow to calculate volatility for black scholessharpes ratioblack scholes fx optionblack schole option pricing modeledgar 13f filingsmeasure of skewness formulacalculating sample variancemeaning of rsi in stock markettotal sum of squares calculatorbackwardation curvepayoff graphwhat is vxx etfform 13f faqfxe etf13f filings searchformula of population meanstd dev calculatorhow to work out skewnesspositive and negative numbers calculatorsynthetic straddlelogarithm in excelaapl implied volatilityoption delta hedgeimplied volatility calculation