Delta
Delta approximates the option-value change per unit change in the underlying, with other inputs held constant. A simple long call generally has positive delta and a long put negative delta. Delta changes with underlying price, time and other factors, so a hedge constructed from today's delta needs monitoring and possible rebalancing. Contract size and the sign of the position matter: the writer has the opposite sensitivity to the holder. Delta is not an exact probability of exercise in every model and is not a reliable linear estimate for an arbitrarily large price move.
Worked example
A long call has delta 0.6. A small $1 increase in the underlying implies an approximate $0.60 increase in the option's value per unit, holding other factors fixed. A short position in 1,000 such units has delta −600 underlying units.
Common mistake
Ignoring whether the option position is long or short, or assuming a delta hedge stays neutral after prices change.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |