3
$\begingroup$

Is there any regular relationship between Delta and the Time-To-Expiry of an option?

I have observed that options that expiry sooner are more sensitive to underlying movements (with equal strikes). Is there any way to justify this relationship?

I suppose that at some point as well as the options get's closer to the expiry it's delta will be much lower for deep-in-the money or deep-out-of-the-money option.

$\endgroup$
2
$\begingroup$

Here is a page from The Options Guide with an understandable picture.

Time to expiration and delta

They explain,

As the time remaining to expiration grows shorter, the time value of the option evaporates and correspondingly, the delta of in-the-money options increases while the delta of out-of-the-money options decreases.

This happens because the shorter expiration that is deep in-the-money tends to behave as the stock, with an underlying gain of $1 having an option movement of more than 95 cents (that's a delta > 0.95).

But with a shorter expiration, the out-of-the-money option has very little chance of being exercised. Thus, the option movement is small, perhaps 5 cents (that is, a delta around 0.05).

$\endgroup$
4
$\begingroup$

You are looking for the Greek commonly referred to as Charm. This is a quick visualization with a good chart I found on Google:

https://www.optiontradingtips.com/greeks/charm.html

$\endgroup$
  • $\begingroup$ Along with Charm, have a look at Color too. $\endgroup$ – amdopt Mar 14 '17 at 19:48
0
$\begingroup$

Yes, the 'delta' has correlation with 'theta'. It is called 'second-order greek Charm' . For OTM options, the delta in last few days of trading is approaching 0(zero), while for ITM options delta approaching 1(one) in last few days of trading. here few examples: example_1: price of underlying = $100, strike = 110, interest rate = 1, implied volatility = 100 . (out of the money call option) delta tends to move closer to 0

example_2: price of underlying = $100, strike = 90, interest rate = 1, implied volatility = 100 . (in the money call option) delta tends to move closer to 1

more details could be found at this article: https://optionstrade.info/delta-vs-time-decay/

$\endgroup$
  • $\begingroup$ Please make the answer stand on its own by incorporating the charts into the answer. $\endgroup$ – Bob Jansen Mar 13 '17 at 15:25
  • 1
    $\begingroup$ I think the sentence "Yes, the 'delta' has correlation with 'theta'." is problematic. First, "correlation" is a measure of linear dependence. Second, instead of "theta" which is the price sensitivity you probably mean "time-to-maturity". I think "Yes, 'delta' has a time-to-maturity dependence." makes more sense. $\endgroup$ – LocalVolatility Mar 14 '17 at 18:26

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.