Delta
How much does a position's value move for each small step in the underlying price, and what does that tell a trader about exposure?
In plain words
Delta measures how much the value of a position changes for a small move in the price of the underlying asset. A full delta means the position tracks the asset one for one; a smaller delta means it moves proportionately less. For options it also shows the likelihood of ending in the money.
Why it matters
Delta turns a position into a comparable number. Two positions with different sizes, structures or strikes can be added together by delta to reveal total market exposure. If that total is far larger than intended, a small move in the underlying can produce an unexpectedly large change in account value.
In a real week: ETH, week of 9 January 2023
In the week of 9 January 2023, ETH rose from an open of 1290.15 to a close of 1552.52, a gain of 20.34%, inside a range of 24.47%. A position with a full delta would have gained about 20.34% over the week. The largest one-hour move was 6.16% on Saturday 14 January at 00:00 UTC, which would have moved a full-delta position by 6.16% in that hour alone.
A common mistake
Treating delta as fixed. Delta itself shifts as the underlying price moves, as time passes and as volatility changes, so a position's sensitivity can drift away from what it was when the position was opened.