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).