Delta and the consistent ( or lack thereof ) relation to............
an Option over the length of its life. My question is this...... Say for instance, that I buy a JAN 2015 call on MSFT today ( Feb. 26, 2014 ) and that I buy a In the Money call that ( Today ) has a a Delta of 1.00 .
Will I continue to get the full 1.00 relation of the Delta to the stock for every dollar in price , that MSFT moves, up until the Expiration date of JAN 2015 ?
And also, if I buy the In the Money Call on MSFT todday, that has the Delta of 1.00 , will that relation between the 1.00 Delta and the stock remain constant, even if MSFT moves just .30 cents?
Say MSFT moves .30 cents, or .71 cents. So if it moves these various amounts in price, will that 1.00 delta relation remain ( I'd gain .30 cents, or ,71 cents on my Option correct ) ?
Sorry if my question is a bit confusing, it kinda confused me when I was trying to simplify my question myself lol
Thanks as always, I really appreciate it - Michael
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Hi, no delta will change due to a number of factors over the life of an option. If you research delta profile, you'll find more detailed information. But essentially it's the gradient of your option positions value graph and that graph will look different for a call/put or whether you're long/short. Essentially if delta is 0.5, a 1% move in the underlying will move the options value by 0.5. Etc.
For a simple call.
When you're OTM the delta will be 0
As you approach the ATM / strike price delta will start increasing
As your call passes the ATM it will approach 1
An almost one year option with a Delta of 1.00 will have to be so deep in the money that you might be better off just buying the stock because you will be giving away more on the bid/ask spread of the option than the stock.
Delta represents the markets assumptions for a strike to be ITM by expiration using the best mathematical models available. Delta's change is represented by gamma which is per dollar change in underlying, so for a delta .60 with a gamma of .15 if the underlying goes up one dollar the resulting delta is .75 . Gamma is also variable though so this is not exactly how it works because for each tick up in the underlying the gamma will also increase slightly, so the resulting delta for the dollar move may actually be .76 and the resulting gamma .17.