Know your Delta (part 1)
At FS Securities we always recommend diversification and for those clients who seek higher return, we trade options for them (options are derivative instrument). They are called derivate because their price is derived from the underlying price of stocks.
Traders who want to use leveraged trading to maximise their returns can trade either Options, Contract For Difference (CFD’s) or margin lending to name a few.
Many years ago options were introduced to Australians. Several years later, CFD’s arrived to our shore from Europe. Unfortunately a lot of traders did not understand how options work and did not realise that when share price goes up (as an example by 10%), the option price did not go up by the same percentage. This is due to something we call “DELTA”.
Confusion was experienced by traders as they could not fully understand the relationship between actual change in the price of shares and their effect on the price of an option.
Delta is a measure on how the price of an option may vary in relation to the change in the price of a stock. Delta can vary between 1.0 and -1.0 (sometimes expressed as 100% or -100%).
In part 2 tomorrow I will explain how delta is defined, worked out and few examples.