Delta measures how much an option's value can be expected to change with a point change in the underlying, but delta doesn't remain static except over a small price change. As the price of the underlying changes, delta starts moving around the dance floor. Sometimes delta waltzes and sometimes delta does the quickstep. Which dance delta is doing can matter. It can matter a lot.

Let's look at some examples. As of midmorning on October 15, 2009, the OEX NOV 540 call (OEBKH) had a delta of 0.09 or 9 with the 100 multiplier applied, but delta wouldn't have stayed the same as price changed. The OEX was at 503.32 at the time, but the following table showed how delta would have theoretically changed as price did.

Table Comparing OEX Price to Delta for OEBKH:

As you can see from this table generated by OptionsOracle, a 5-point change in the OEX's value, from 503.38 up to 508.38, has changed the delta by 3.5556. Delta is waltzing along.

What if the option chosen had a higher delta at the beginning, when the OEX was hovering around 503.32? To create a table for a comparison of the same five-point change, I used the OEX NOV 530 call (OEBKF).

Table Comparing OEX Price to Delta for OEBKF:

Here, the same five-point OEX price change resulted in a change in delta of 5.2084 points. Delta is dancing a little faster, not quite quickstepping, but certainly not waltzing any longer, either.

Why is this significant? Imagine the case of a trader who is selling credit spreads, perhaps alone or else as part of an iron condor trade. Those spreads are usually, not always, sold out of the money, and the seller, the person opening the credit spread or the iron condor, does not want the underlying's price to move through the sold strike.

In addition to measuring how much the option's price will theoretically change with each one-point move in the underlying, delta does something else: it gives a percentage estimate of how likely that option is to finish the expiration period in the money. In the case of the OEX NOV 540 call, a five-point move in the OEX wouldn't have changed that probability all that much, but the same five-point rise in the OEX would have pushed the OEX NOV 530 call's delta above 22.00. This is significant because some devotee's of former market maker Dan Sheridan's CBOE webinars use a 20-24 delta as an adjustment or hedging point for their credit spreads. In the first case, a five-point move in the OEX wouldn't have moved the delta too far toward that adjustment point, but in the second case, it would have brought it right to that point.

For those credit spread traders, once an option's delta moves above 15, it seems that each little tick up or down in the underlying's price changes the delta by a point, too, and sometimes that's true. One point up or down, and you're safe if you're using that guidepost, or needing to adjust.

Of course not all iron condor or credit spread traders sell their credit spreads at low deltas such as 8-10 and not all use those delta levels as guideposts to adjust, but it's still important to realize that delta is going to switch from a waltz to a quickstep once it moves above those 15-16 levels. Credit spreads and iron condors are going to start getting into trouble more quickly, and the theoretical probability that the sold strike will end up in the money at expiration starts going up faster. A 20-24 percent chance is still not a big chance of being in the money at expiration but tell that to some iron condor traders who did not adjust in September as their sold calls' deltas first move through those levels.

Not all option traders trade credit spreads or iron condors, of course. Some trade directionally. They might employ long calls or puts or debit spreads. Debit spreads consist of a long call or put with a further-out sold call or put to partially offset the purchase price of the long call or put. In these cases, the trade benefits as the absolute value of delta rises, so that the trader wants delta to start quickstepping. In these cases, those far-out-of-the-money options with deltas in the 8-10 range are just not going to move much with any price change in the underlying. A big price change will be required before delta becomes more responsive and the long call or debit spread starts profiting. OptionsOracle estimates that a five-point rise in the OEX would have resulted in a $54.24 profit in the OEX NOV 540 call and a $98.75 profit in the OEX NOV 530 call, with the higher original and faster-dancing delta. Both of those are calculated mid-price to mid-price. They're not taking into account slippage when getting between the bid and ask, and the calculations don't take commissions into effect, either. So, it's possible that the five-point move in the OEX wouldn't have resulted in much or any profit for the OEX NOV 540 call, while the OEX NOV 530 would almost certainly have produced at least some profit for the trader, even with that slippage and commission costs factored in.

McMillan of Options as a Strategic Investment fame suggests that day traders should be trading the underlying, not options, but if they're trading options, they should trade options with deltas as high as possible. When I was still day trading, I bought options with the absolute values of their deltas at about 70 (or 0.70 without the multiplier) as a balance of the right price for the option and enough price movement with the price of the underlying. That delta meant that my option's price was going to suffer with each move in the wrong direction, too, of course.

On that same October 15 morning, the OEX NOV 485 call (OXBKQ) had a delta of 72.30.

Table Comparing OEX Price to Delta for OXBKQ:

For daytraders, a five-point rise in the OEX, the underlying in this case, would have resulted in a much heftier $378.81 profit. Losses would have accumulated more quickly, too, if the OEX dropped.

Notice, however, that delta changed only 4.7162 with a five-point climb from 503.3880 to 508.3880. Delta will soon begin waltzing again in this range. By the time it hit 80, a 6-point move in the OEX would be required to move it to 85. Another 9-point move in the OEX would be required to move delta from 85 to 90.

Moreover, I deliberately chose an option with at least 30 days to expiration. Delta changes differently with about-to-expire options. Changes in volatility can impact delta, too.

Perhaps you're throwing up your hands about now. If it's this complicated, why even try to figure it out? The point is that delta doesn't perform the same dance all the time. James Bittman plots delta against the underlying's price in Trading Options as a Professional (93).

Delta of 100 Call vs. Stock Price, page 93:

Delta of 100 Put vs. Stock Price, page 93:

Notice the way the curve flattens for far-out-of-the-money or deep-in-the-money options but sharpens in the middle of the charts?

Know that if you're selling credit spreads, once the delta gets above about 15 and particularly above 20-22, the theoretical probability that the sold strike will be violated at expiration starts moving up quickly. Those spreads are going to become rapidly more expensive if you need to buy them back to close them. If you're a day trader buying long calls or puts, know that if you're buying calls or puts so far out of the money that their deltas are low, you're not going to benefit much by price changes in the underlying, and that's not going to change until there's a rather hefty change in the underlying.

Most trading platforms provide tools for pricing options under different conditions. Even if you just want to see how the price will change and don't want to delve into delta, spend some evenings running such theoretical option pricers on your brokerage's platform. Decide where you think the underlying might go, and also where you fear it might go if it's going against your theoretical trade, and then compare the performance of several options. Be sure to include a possible drop in volatility if your theory is that the underlying is going to rise and a rise in volatility if you think prices are going to drop significantly.

The object is to get a feel for which option works best for your preferred strategy. You might also use an options-related book such as Bittman's Trading Options as a Professional. In addition to the charts shown above, he spends many pages presenting graphs showing how delta changes as expiration approaches and volatility changes.