Trading and investing in options is all about probabilities.
Determining the current probability of an option expiring in or out of the money is vital when trying to estimate the likelihood of your maximum loss or potential gains.
You can also know what option traders think about the future potential of an option’s price. Knowing this is a good way to check your own estimates against other trader’s opinions.
[VIDEO] Understanding Delta
One way you can know is by watching “Delta,” one of the option Greeks.
Delta is a measure of how fast an option’s price will move relative to the underlying stock. Delta is also a measure of the current likelihood that an option will expire in the money.
If delta is very high, the probability of an in the money expiration is also high.
That means that if your maximum loss is the premium you paid for the option, then a very high delta indicates a low probability of losing the entire premium.
In the video, we will look at how delta changes with the option premium and the distance of its strike price from the current market price.