What Is Delta?

Patrick Curtis

Reviewed by

Patrick Curtis WSO Editorial Board

Expertise: Investment Banking | Private Equity

Delta is a term used in trading to compare the change in price of a derivative compared to the change in price of the underlying asset. Delta is one of the 5 technical risk ratios and is sometimes known as the 'hedging ratio'.

Delta is used to calculate risk and whether a position is suitably hedged or not. An example of delta is as follows:

  • A call option on oil has a delta of 1.2
  • This means that for every $1 that the price of oil increases, the value of the call option will increase by $1.2

If an investor holds options as a means of hedging and they have a low delta, then the movement in option value will not offset any losses they experience on the underlying asset and therefore they are likely to be underhedged.

With options, as they near their expiry date their delta will tend to 1 (call) or -1 (put).

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Patrick Curtis is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. He has experience in investment banking at Rothschild and private equity at Tailwind Capital along with an MBA from the Wharton School of Business. He is also the founder and current CEO of Wall Street Oasis This content was originally created by member !member and has evolved with the help of our mentors.

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