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Option Question about Delta
- Thread starter the
- Start date
An answer ? Maybe not.
Quote from the:
I've heard one way to interpret delta is that it is the probability of an option finishing in the money. For example, a delta of .50 means that it should have a 50% chance of finishing in the money. This makes intuitive sense as an option with a delta of .50 is probably at the money.
I've always thought this was the case as this was mentioned in several books I've read and even a market maker said so; however, I'm reading through Cottle's book and he says this a poor interpretation as it is mathematically incorrect.
So is this a correct way to interpret delta?
Thanks.
Whoever confuses delta with the above prob, partioularly for ATM strike, is probably an idiot. However the more one gets away from ATM strike, the less is the difference between the two. The fact that options have the highest prioce for ATM strike, may be viewed as loud reflection of "the difference between delta and prob is highest ATM". Yet the idiots who write books take the worse case approximation to wrongly equate the two.
I have explained the analytical/intuitive underpinnings of the difference between the two in a blog post somewhere.
Quote from tradingjournals:
Whoever confuses delta with the above prob, partioularly for ATM strike, is probably an idiot. However the more one gets away from ATM strike, the less is the difference between the two. The fact that options have the highest prioce for ATM strike, may be viewed as loud reflection of "the difference between delta and prob is highest ATM". Yet the idiots who write books take the worse case approximation to wrongly equate the two.
+1
All delta means is the amount the price of the option will change in value for every point the underlying stock moves. Delta is highest at the money and lowest out of the money. Gamma is how much the delta will change if the uderlying stock moved a pt.