We all know option contracts are derivatives, and option prices are derived from the underlying stock, index, ETF or futures contract. But with other factors at work – implied volatility, time decay, etc. – how can you know how much an option is going to move with respect to said underlying? Very simple – check out the option’s delta.

Delta is arguably the most heavily watched of the option greeks, as it offers a quick-and-dirty way of telling us what to expect from our option positions as we watch the price action of the underlying. Calls have positive deltas, as they typically move higher on a rise in the stock, and puts have negative deltas, as they typically move lower when the stock rises.

While some option traders view delta as the percentage chance an option has of expiring in-the-money, it is really more of a way to project expected appreciation or depreciation. This can be a really practical use for option greeks. A delta of 50 for a call suggests the option should move 50 cents higher when the stock jumps a dollar, and lose 50 cents for every dollar loss in the stock.

But delta is only foolproof when all other option pricing factors hold static, which is rarely the case (and certainly never the case for time decay). If an option is moving more (or less) than its delta would suggest, it is likely because other variables are shifting. For example, buying demand might be pushing implied volatility higher, raising the price of the options. Still, this king of all option greeks is a good starting point for gauging how your option positions are likely to move.

Dan Passarelli, Market Taker Mentoring