Delta effect

Learn how delta affects the value of an option

This Volcube Option Mini-game tests your understanding of how a change in the price of the underlying affects an option with a given delta. For simplicity, in this game we can assume that the delta of the option will not change. Here’s an example.

DELTA EFFECT

Call or Put:                  Call
Delta:                          90%
Old spot:                     216.17
New spot:                    215.43
Old option value:         12.36
New option value:        ???

In this game, we have a call option with a 90% delta. The spot price has fallen from $216.17 to $215.43. The call option had a value of $12.36 with the spot trading at the original price of $216.17. Our challenge is to calculate the new option value.

Let’s remember the basic definition of option delta:

Delta = Change in option value / Change in the price of the underlying product

In this instance, we need to re-arrange the formula to discover the change in option value given the delta and the change in the underlying product price. So,

Change in option value = Delta * Change in spot price

The delta is 90%. And it is positive, because call options have a positive delta. The spot price has fallen 74 cents, so that’s a change of -0.74. So the fall in the call’s value is 90% of 74 cents i.e. 66.6 cents. So the new option value is the old value minus 66.6 cents = 11.694.

Notice in this example that the option falls in value by a large amount relative to the size of the drop in the spot price. This is because the call option must be deep in-the-money and consequently it has a large delta. Options with a larger delta are more greatly affected by changes in the spot price. Their values are more sensitive to changes in the spot price.

Use this Volcube mini-game to make sure you can calculate the change in an option’s value for a change in the spot price, given the delta. Be careful to remember that puts have a negative delta and therefore falls in the spot price lead to rises in the value of puts.

Want to learn how to trade options?

Why not start a FREE trial of Volcube and you can play several option mini-games to improve your option trading knowledge. Find out more.

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Volcube : options education technology

Volcube : options education technology

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