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Ask the Institute

DATE: May 12, 2014

QUESTION:

Can you explain how Delta affects an option's price?

ANSWER:
Delta is an estimate of how much an option's price will change if the stock price changes by $1. It is important to realize that options prices do not change the same way that stock prices change. If a stock price rises by a $1, a call price will rise by less than a $1. In fact, a call's price will rise by the delta of the call. For example, if a call has a delta of 0.25 and the stock price rises by $1, the price of that call will rise by approximately $0.20 (20 cents). Put prices, because they move inversely to stock prices, will go down by their delta when the stock price rises.

Delta is an important concept in understanding option price behavior; because it gives options traders a realistic expectation of how much their options prices will change given a forecast for the underlying stock. To learn more about how Delta affects an option’s price, view this segment of "Ask the Institute."


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