Explain the Concept of ‘Delta Decay’ for ITM Options.
'Delta decay' for In-the-Money (ITM) options refers to the phenomenon where an option's Delta moves towards 1 (or -1) as time to expiration approaches. This is not strictly a 'decay' in the negative sense, but rather a convergence to the theoretical maximum.
As the uncertainty of the option expiring ITM decreases with less time remaining, the option's price movement more closely mirrors the underlying asset. This convergence is driven by the decreasing time value and the increasing certainty of the option's intrinsic value.
Glossar
Delta Decay
Sensitivity ⎊ This term quantifies the rate of change in an option's Delta with respect to the passage of time, a relationship governed by the Greek Theta.
Underlying Asset Influence
Sensitivity ⎊ Underlying asset influence refers to the direct impact of the underlying asset's price movements on the value of a derivative contract.