Derivatives and Delta 101

Derivatives and Delta are a nice way of summarizing all that we have learned till date. So, without wasting the time that you could’ve otherwise spent working on a non-meaningful job floated as your life’s sole aim by LinkedIn, we’ll start.

Derivatives are financial instruments whose value is ‘derived’ from the underlying asset or group of assets. Put simply, a gold derivative might allow you to trade with the fluctuations in the price of gold. All those options, futures and forwards that we studied are known as derivatives. Why? For their value is based on the movement of stocks or bonds or assets they represented.

In our example for call options, wherein the value of flat rose to ₹3 cr from ₹2 cr after Sarkar built metro, the call option would be called as a derivative because it derived its identity from the rise or fall in the value of that flat in Bellandur. Derivatives can be traded on an exchange like NSE/ BSE (e.g., futures, options) or can be setup like a contract between two parties – consider, forwards.

Now, delta is the financial geek food. Basics: It is the change in the value of the derivative with respect to the change in the value of the underlying asset. A delta of, say, 0.35 would mean that with every ₹1 change in the value of the Bellandur flat, the price of its call option would increase by ₹0.35. Quite obvious, if the value of your property is rising, you’d definitely want a higher token amount from the buyer to give her the right to purchase it at a later date. Delta just tells you as to by how much can you increase that token amount when the price of property rises by ₹1. The value of call options ranges from 0 to 1 and for put options they vary from -1 to 0. 

But before you move out of this chat, we’ll stop; for, this is just the basics. We will try to cover more on spreads and delta trading strategy in 102s and 103s.

Bye for now!

And your job’s great and meaningful. Was kidding. Enjoy.