One of the Greeks, delta measures the rate of change in an option’s theoretical value for a $1 change in the price of the underlying security.
Delta can also be used as a proxy for estimating probability of being ITM. The two numbers are very similar, especially if volatility skew is low in a particular market. For example, if we’re looking for a 1 standard deviation option, which would be the 16% probability of being ITM, we can just look for the 16 delta option. It will likely be very close to the actual strike that would represent the 16% prob ITM, if it’s not that exact strike already!
If you’re familiar with the show, you’ll notice the show hosts refer to being delta neutral a lot. This just means that they have various positions on (some bullish and some bearish) but their overall portfolio is pretty delta neutral. It can be very difficult to trade directionally, so we often choose to keep our deltas neutral. This means that if there are big directional moves in the market, our portfolio will be at less risk than if we were fully directional and wrong. We rely on theta decay, and implied volatility overstatement as our main drivers of long term edge, not directional trading.
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