But First, Meet a Greek

But before we analyze straddles in more detail, we will take a quick refresher about delta, one of the Greek letters used to describe option behavior. Delta is defined as the expected change in the price of an option for a \$1 change in the price of the underlying. For example, if a stock is trading at \$38 the 40 call may have a delta of 0.45. This simply tells us that if the stock’s price rises to \$39 the value of the call can be expected to rise by \$0.45.

On this same stock the 35 put could have a delta of -0.35, telling us that on the same move to \$39 the value of the put would decrease by \$0.35. Keep in mind that calls have positive deltas (their value increases as the stock rises) and puts have negative deltas (their value decreases as the stock rises).

Note that the delta of any complex option position is equal to the sum of the individual options’ deltas. For example, if an investor buys a call with a delta of 0.60 and also buys a put with a delta of -0.35, then the total position’s delta is 0.60 + (-0.35), or 0.25. This simply tells us that if the underlying increases by \$1 the total value of the call and put will rise by \$0.25.

One last point is that the delta of a stock is +1.00. This may appear self-evident (when a stock goes up \$1, its value goes up by \$1) but will prove very useful below.