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Delta: Relationship between Delta, Options, and Futures



Relation between delta, future, and option- Many investors keep thinking on this point and yet cannot reach an exact conclusion; they cannot reduce the level of risk and still earn profit.


We have seen that the option Greeks tell us how its value will change with the change in various other factors such as market price, rate of interest, Volatility, and expiration. A futures contract is something that allows you to transact the underlying stock at the current price, but you have to deliver the same on any future date.


So, suppose you sold an asset at Rs.100 and in the future, its price is 120, then Rs.20 is your loss, but on the other hand, if its price goes down to Rs. 80 then you can say you earned a profit of Rs.20.


Delta is a metric that estimates the risk associated with the change in the price of a derivative, like an option contract. Delta even provides the traders dealing with options the hedging ratio to become delta neutral. We can also say it's a theoretical estimate of how much an option's value will change in a given period of the underlying security.


Option Delta is a measurement of how much an option's price reacts to the underlying market price changes. Call Options delta will vary from 0 to 1, whereas the option Delta varies from 0 to -1. When it is out of the money, it is closer to 0.


We can also say that call options have a positive delta and put options negatively from the above figures. But as some traders do not write delta values in decimal points, so they consider 0 to 100 and 0 to o-100; they may refer to .3 as 30 and .7 as 70.


While trading, traders must keep a few points in mind, such as follow:


Delta has been termed as the probability of expiry of ITM, so, at the money (ATM) option has a delta value around 0.5 and In the money has a value near to 1 and Out of the money (OTM) has a delta value near to 0.


For the Call option, the delta is positive, and for the put options, the delta is negative.


Considering the above statement, when the price of any stock rises, it is a positive sign for call options and, at the same time, negative for put options.


Delta keeps changing from time to time, and it depends on many factors like interest rate, Volatility, current price in the market, and expiry date.


Let us take an example of the relation between delta, option, and future for better understanding.


Suppose the call option is valued at 1.00 and has the delta value of 0.50. This implies that whatever the underlying future change is, the option will move by 50% of that change.


Now, if the underlying future moves from 95 to 96.5 (movement of 1.5) Thus, the premium on the option will move 50% of 1.5 (movement), which comes to .75. Therefore the new price of the future option now is 1.75 (1 original price + 0.75 premium).


Conclusion


Kindly remember a few points listed below. It will help you memorize the concept of delta, options, and futures.

  • The delta of a futures contract is always 1.

  • Calls are between positive 0 to 100, whereas puts are negative 0 to -100.

  • Long call options are a positive delta, and short call options are negative.

  • Any delta value lower than 50 is out of the money; if greater than 50, it is in the money, and if it's near 50, it is at the money.

  • Delta can also be used to obtain a delta hedge position.


So, we hope now you must be clear with the relationship between them and how the value affects based on various factors and what results to expect.


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