Quite a few traders I've met with/interviewed with have told me that at the money options have a delta of 0.5. One exotics trader told me that straddles are delta neutral by definition.
- Correct me if I'm wrong, but the delta of a call, which is N(d1), can only be 0.5 if d1 is exactly = 0, and d1 is only equal to 0 if the call is both at the money AND at expiration, otherwise d1 is still slightly positive, which means delta > 0.5.
- Similarly, the delta of a straddle is put delta + call delta = 2N(d1) - 1, which can only be equal to 0 if N(d1) = 0.5.
So, what am I missing here? This might come up in interviews, so I want to clear this up right now.
Before addressing OP's question, it's important that you understand the terminology used when talking about options. Here are some key definitions to remember:
What is the Correct ATM Option Delta?
Per hedge fund and sales and trading professionals on the forum, you need to use the forward price to price an option. The ATMF (at the money forward) strike should be roughly 50 delta. This is an approximation or estimation that traders use as a general rule of thumb
Certified Sales & Trading Professional - Executive Director @FXTrader also provided a few questions he asks in S&T interviews to help interns prepare:
- Describe the relationship between delta and implied vol for a vanilla option and tell me what happens to the delta of an option ATM if we get a 1%, 10%, 100% rise in implied vols
- Say you're on the desk and a salesperson gives you the following
- Spot = 100
- (an OTM call option)
- Expiry: 1 year
- Vol: 10%
- Your pricer will spit out a delta of say +18%, for you to make your hedging decision
- If I changed that vol to 20%, and leave everything else constant, what kind of delta would my pricer spit out? higher (e.g. +35%) or lower (e.g. +10%) ?