DeltaDelta is a measure of responsiveness of an option's price relative to the change in price of the underlying security. For instance, if GS calls have a delta of 0.8, for every $1 that GS rises, the GS calls will rise by 80 cents per share, or $80 per contract. Sometimes an option’s delta is not listed as a decimal, but as a whole number - perhaps '60' in the previous case. However, a delta can never be greater than 1.00, or 100% ... that's just an alternative way of describing how responsive an option is to change in the underlying stock. The more conventional representation is in decimal form.
For put options, since they increase in value as the underlying stock or index moves lower, their delta is given as a negative number. Had a put been considered instead of a call in the above example, and the responsiveness was still 0.70 worth of change for every $1.00 in the underlying, that put would have been given a delta value of -0.70. In the case of put options, delta is expressed as a negative number.
Theta
Also known as time decay, 'theta' is the amount of daily reduction of an option contract's value as the expiration date approaches. The amount is generally expressed as a negative number, though some data providers simply display the amount of daily loss as a positive number. It's also important to understand that some data providers express theta for an entire contract, while others might supply a theta value simply for one underlying share. Since an option contract represents 100 shares of a stock, in the latter case the theta value would need to be multiplied by 100 to determine the daily value decline of a contract.
Using the GS call example again, a theta of -.10 would mean the contract loses $10 per day just due to the passage of time.
Like all option Greeks, theta is also usually listed as a decimalized figure. A theta value of 0.07 simply means that for each share of a 100 share contract, that contract loses 7 cents per day. Or, the entire contract loses $7.00 in value every day. This daily loss includes weekends.
Obviously theta and delta have an immediate impact - for better or worse - on an option's value.
For this reason, most traders compare several 'what if' delta and theta scenarios before choosing an option. For an option owner, the higher the delta, the better the likely dollar movement from the option as the underlying stock or index moves lower. However, high-delta options usually cost more (and are usually deeper in the money), which can offset the benefit of a strong delta.
There is no particular argument for or against high-delta options. The lesson to be learned is simply that not all options are the same. An individual trader must weigh the upside and the downside of a variety of option trading scenarios to determine which delta makes the most sense with respect to risk and reward.
