Measuring Directional Exposure with Delta: Single Option and Option Spreads

Delta as a measure of directional exposure

The relationship between the underlying stock’s price changes and the option’s price changes is measured by the well known Greek letter delta. In general, delta measures by how much the value (market price) of an option or an option spread position changes when the market price of the underlying asset (e.g. a stock) changes by 1 dollar. You can see a more detailed introduction to delta here: Option Delta.

Besides individual options, delta can be used to measure the directional exposure of whole option spreads or other positions combining multiple options on the same underlying asset.

Delta of call options

For call options delta can reach values from zero (far out of the money options) to one (deep in the money options). At the money options have delta around 0.50. This means that when the underlying stock increases by 1 dollar, the option’s market price rises by 50 cents.

Delta of put options

For put options delta has values between negative one (deep in the money puts) and zero (far out of the money puts). At the money put options have delta around -0.50. When the underlying stock decreases by 1 dollar, the put option’s market price rises by 50 cents (same as with calls, just inverse).

Measuring directional exposure of option spreads

Options’ delta is additive and therefore it is an effective tool for measuring directional exposure also for more complicated option spreads and combinations of multiple options. You simply add all deltas of your long options and subtract all deltas of your short options and the result is the total delta of your position. You can see an example here: Delta Hedging.

Bullish and bearish option spreads and delta

If the total delta is positive, you have bullish exposure to the underlying asset (you make a profit when the price of the underlying asset rises). If it is negative, you are bearish (you profit from decline of the underlying asset’s price). Unlike the delta of a single option, the total delta can be higher than one or lower than minus one for combinations of multiple options.