A market assumption that makes life easier is to believe that liquid markets are fairly priced, that is, the wizards at Goldman Sachs would buy anything undervalued and sell anything overvalued to put things back in line.
There may have been a time that the markets weren’t as efficient but technology has eliminated any price displacement.
For option traders the delta is an important attribute because it reflects how closely associated movement is to the underlying instrument.
The at the money option has a delta of approximately 50%, meaning that for every dollar that the stock or ETF moves, the option moves 50 cents.
An out of the money of the money option has a lower delta as it does not move as significantly and is often the reason it is relatively cheap.
On the other end of the spectrum, the in the money options act much like the stock or ETF and are expensive because of that attribute.
The delta of an option is readily available on any trading platform or option chain. Mathematically that delta for our purposes is an approximation of the odds for that option.
The delta is the probability that that option will be in the money at expiration. It is a good guidepost to comparing option probability to costs for decision making.
You can decide the probability that fits your risk tolerance and trading personality with that delta as simple guide.
