Using Delta to Measure Directional Risk

Now, it's time to learn about how an option's delta value represents its price sensitivity relative to movements in the stock price.

As mentioned:

➜  Call deltas are positive, ranging from 0.0 to +1.0

➜  Put deltas are negative, ranging from -1.0 to 0.0

Consider the following call option positions:

Now, let's compare the sensitivity of these positions:

➜  The call option with a delta of +0.95 is expected to experience a price change of ±$0.95 with a $1 change in the stock price.

➜  The call option with a delta of +0.10 is expected to experience a price change of $0.10 with a $1 change in the stock price.

Consequently, a call option with a delta of +0.95 has almost ten times more directional risk than a call option with a delta of +0.10. The same concept applies to put options.