Delta
The amount by which an option’s price will change due to an incremental change in price of the underlying asset. Digital call options have positive delta, while digital put options have negative delta. Technically, the delta is an instantaneous measure of the change in the option’s value over a change in the underlying asset price; the delta will be altered for even fractional changes of the underlying entity. The delta is the first derivative of the option price with respect to a change in the asset price. See also Hedge Ratio.
Delta Spread
A ratio spread that is established as a neutral position by utilizing the deltas of the options involved. The neutral ratio is determined by ensuring that the number of long contracts of the lower strike option multiplied by the lower strike delta equals the number of short contracts of the upper strike option multiplied by the upper strike delta.
Example: Lower Strike Call Delta = 0.3333 & Upper Strike Call Delta = 0.25.
If 3 of the lower strike calls were bought against selling 4 of the upper strike call then it is a neutral position.
See also Ratio Spread.
Derivative security
A financial security whose value is determined in part from the value and characteristics of another security, the underlying security.
Diagonal Spread
Any spread in which the purchased options have a longer maturity than do the written options as well as having different striking prices. Typical types of diagonal spreads are diagonal bull spreads, diagonal bear spreads, and diagonal butterfly spreads.
Downside Protection
Generally used in connection with covered call writing, this is the cushion against loss, in case of a price decline by the underlying security, that is afforded by the written call option. Alternatively, it may be expressed in terms of the distance the stock could fall before the total position becomes a loss (an amount equal to the option premium), or it can be expressed as percentage of the current stock price. See also Covered Call Write.
Dynamic
For option strategies, describing analyses made during the course of changing security prices and during the passage of time. This is as opposed to an analysis made at expiration of the options used in the strategy. A dynamic break-even point is one that changes as time passes. A dynamic follow-up action is one that will change as either the security price changes or the option price changes or time passes.