General Topics
Technical Topics
Brokerage Firms
Community Lounge
Site Support

# Why does delta go down when expiration nears?

Discussion in 'Options' started by kivd, Aug 17, 2011.

1. ### kivd

I thought the delta should go up as expiration nears.
I always thought that before expiration, a call option has time value, so the delta is less than 1.00 because as the stock rises, some time value is killed. Except on expiration there is no more time value, so if the stock jumps \$1 the options must absorb all of it or else it would underpriced.
But in the ebook I'm reading it sais the delta goes down?
(I put in a screenshot)

File size:
37.9 KB
Views:
114
2. ### MTE

As expiration approaches the delta for OTM options approaches zero, while the delta for ITM options approaches 1 for calls and -1 for puts. The delta for ATM options stays approximately the same.

3. ### pwrtrdr

Yes, but why.......

4. ### Rodney King

Delta can be thought of as roughly, 'the probability the option will expire ITM.' So, OTM options' deltas go to zero as expiry approaches, because they're increasingly unlikely to be worth money, and ITM options' go to 100 because they're increasingly unlikely to be worth nothing.

5. ### pwrtrdr

Agreed, I bet original poster appreciates that,

Most things here on ET are grey vague at best, people spout about methods and such but ont explain. If they dont want to elborate why post.... ?

Thanks

6. ### MTE

Just to add to what Rodney King has already said. At expiration an option is worth its intrinsic value, so the closer you get to expiration the more an ITM option would move with the underlying. That is, each move in the underlying is directly reflected in the intrinsic value of an ITM option.

On the other hand, the value of an OTM option is entirely time value or extrinsic value and the closer you get to expiration the less time value an option has and thus the move in the underlying has less and less impact on the value of an OTM option.

7. ### pwrtrdr

Yep, I think its Natenberg book that goes over vey basic details to complex.... good book

down, if carry>=0.

9. ### joneog

Go long an otm position heading into exp and you'll learn about it first hand. That pushing-a-rock-up-a-hill feeling is the delta heading towards 0.

10. ### kivd

I got it now, I was just confused between ITM and OTM

#10     Aug 17, 2011
WHILE YOU'RE HERE, TAKE A MINUTE TO VISIT SOME OF OUR SPONSORS: