#308 - Can Option Deltas Ever Be Greater Than 1?

Episode of: The "Daily Call" From Option Alpha

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Jul 27, 20183m
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#308 - Can Option Deltas Ever Be Greater Than 1?
Jul 27 '183m
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Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be answering yet another member question which is, “Can option Deltas ever be greater than 1?” If you go back and think about what option Deltas refer to when it comes to single option contracts, is it refers to the change in price of the option contract or a potential change in price of the option contract as a result of a $1 increase or decrease in the underlying security. Generally, call options have positive Deltas and put options have negative Deltas. And so, when we see a dollar increase in the underlying stock, that's positive for call options, that's negative for put options. But the question is – Can these Deltas ever go above 1? And the short answer to this is no and the reason that they can’t ever go above 1 is because all that single option contract could do is trade at parity with the stock and this Delta of 1 means that for every $1 movement up in the stock, there’s a $1 movement up or if it's a –1, I guess for put a option, there's a $1 movement down in the underlying put option, so it starts trading more and more like the underlying stock.

This is actually pretty interesting because what I talk about often is that when we do get assigned and the rare chances that we do and it’s usually less than half a percent of the time historically have we been assigned on contracts. But when we do get assigned on contracts that are deep in the money, I tell people that the Deltas of those contracts are probably closer to one and so, therefore, the assignment starts acting like stock anyway before it even happens. By being deep in the money on say a short option, whether it’s a call or a put, that short option contract is going to start acting more and more like stock, so being assigned stock is not really any dramatic difference in the underlying position and how it behaves in the market other than the fact that we have to cover the stock position now versus just the option contracts. It’s a really interesting question, but again, the Deltas can never go above 1 on call options, can never go below –1 on put options because at that point, it’s going to start trading at parity with the stock. As always, if you guys have any questions, let me know and until next time, happy trading.

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