How Delta can help you manage your Put Option risk

Delta for a Call option ranges from 0 to 1. However, the Delta of a Put Option ranges from -1 to 0. The negative sign indicates that when the underlying gains in value, the value of premium goes down. Keeping this in mind, let us understand delta of a put option with an example. The objective is to evaluate the new premium value considering the delta value to be -0.55.

Observe the calculations made below in two scenarios.

Scenario-1: Nifty is expected to move to 18910

Expected change = 18910 – 18860 = 50

Delta = – 0.55

= -0.55*50

= -27.5

Current premium = 120

New premium = 120 -27.5 = - 92.5

Here we are subtracting the value of delta because the value of a Put option declines when the underlying value increases.

Scenario-2: Nifty is expected to move to 18820

Expected change = 18860 – 18820 = 40

Delta = – 0.55

= -0.55*40 = -22.0

Current premium = 120

New premium = 120 + 22 = 142

Here we are adding the value of delta because we know that the value of a Put option gains when the underlying value decreases.

With the above two Illustrations it is clear on how to use the Put Option’s delta value to evaluate the new premium value. So, the Put Option’s delta is bound between -1 and 0.

Delta is an Option Greek that captures the effect of the direction of the market. Call option delta varies between 0 and 1, some traders prefer to use 0 to 100. Put option delta varies between -1 and 0 (-100 to 0).

The negative Delta value for a Put Option indicates that the option premium and underlying value moves in the opposite direction.

ATM options have a delta of 0.5

ITM option has a delta of close to 1

OTM options have a delta of close to 0.

(The author is a homemaker, who dabbles in stock market investments in free time)