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Delta

A common way to trade options is to hedge an options position against a position in the underlying market. In measuring Delta, the hedge relationship between an underlying instrument and an option is inverse. If one increases, the other decreases and vice versa. Such a hedge is not influenced by the direction of movement in the underlying contract. A trader uses a hedge ratio to establish this kind of hedge. The hedge ratio is also know as the Delta.

A Delta is a number between -100 and 100. Deltas range from zero for far out-of-the-money calls to 100 for deeply in-the-money calls. Deltas range from zero for far out-of-the-money puts to -100 for deeply in-the-money puts. At-the-money calls have Deltas of about 50 while at-the-money puts have Deltas of about -50. Increasing the volatility causes all call Deltas to move toward 50 and all put Deltas to move toward -50. The underlying contract always has a Delta of 100.

Formula:

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