# Delta

## What It Is:

Delta is the ratio comparing the change in price of an underlying asset to the change in price of a derivative. It is one of the four main statistics, known as "Greeks," used to analyze derivatives.

## How It Works/Example:

Let's assume you own a call option on Company XYZ stock. If the price of Company XYZ stock increased by \$1.00 and the call option increased by \$0.80 in the same time period, then the delta is 0.80 (\$0.80/\$1.00).

Put options work inversely. Since put options lose value as the underlying security increases, delta is a negative number. If a stock increases \$1.00, and the put price decreases \$0.50, then the put option has a delta of -0.50. Deltas aren't constant and change according to fluctuations in the underlying stock's price, time left on the derivative until expiration, and volatility in the underlying stock.

## Why It Matters:

Delta allows derivatives traders to understand what sort of risk/return they can expect from an investment. For instance, if they believe a stock will increase \$2.00 per share in the near future, they can buy a call option on the stock. By using the delta calculation, the investor can calculate their potential gain from the stock's move -- important information to know before taking a risk.

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Cached on April 24, 2014, 12:31 am