Market Measures

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Delta and Probability

Market Measures

Delta can be used as an estimate for the probability of an option falling ITM at expiration. Today, we look at how accurate of an estimate this is.

Study
  • SPY, 2005-Present
  • 15, 30, 40, 50 Delta Calls and Puts
  • Calculated percent of Options ITM at expiration
Results

We found that on the call side, options fall ITM more often than delta tells us, and puts fall ITM less often than the delta tells us. The market has exhibited positive drift, so this is expected. Although it is not perfect, Delta can still be used as a proxy for estimating the probability of an option expiring ITM.

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