When trading binary put options, and exploring new binary options trading indicators, traders often come across Put Delta. But what is this metric all about? How can you use it profitably for binary options trading? Everything you need to know about Put Delta can be found in this article.
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What is Put Delta in binary options trading?
Put Delta is the first derivative of the fair value of the binary put option in relation to a change in the underlying price (S). It is, therefore, a ratio that describes the change in fair value due to a change in price.
Mathematically, Put Delta can be stated as:
Properties of Put Delta explained
Generally, Put Delta has a practical value as it provides a ratio that can convert a position in a binary put option into a corresponding position in the underlying asset.
For example, a long position in a binary put of, say, 100 contracts would be equivalent to 100 binary puts = 0.25 x 100 = 25 futures or short 25 futures if the out-of-the-money binary put has a delta of 0.25.
Put Delta is mirrored by the horizontal axis at zero to create the delta profiles of the binary put options. For this reason, the Delta of a binary put option is always zero or negative, and it has its lowest value when the option is in-the-money. The Delta of a binary put option approaches negative infinity when the time to expiration of the option approaches zero.
Put Delta for futures vs. Put Delta for options
Unlike options, which usually have a non-linear profit and loss profile, futures have a linear profit and loss profile. Therefore, the Delta and the resulting equivalent position apply only to the underlying price.
Variables that affect Put Delta
In addition to the underlying, other variables such as implied volatility, time to expiration, and possibly interest rates and yields also affect the Delta. We can clearly state that the Delta of the binary put options is a dynamic variable.
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