How Is the Probability of Exercise Related to Delta?
In the context of the Black-Scholes model, Delta is often used as a rough approximation of the probability that an option will expire in-the-money (ITM). A Delta of 0.70 suggests an approximately 70% chance of the option finishing ITM.
This relationship is more accurate for European-style options and is a useful heuristic for traders assessing risk and potential payoff.
Glossar
Probability of Exercise
Exercise ⎊ Within cryptocurrency derivatives, the probability of exercise quantifies the likelihood that an option holder will choose to activate their right to buy or sell an underlying asset at the strike price before expiration.
Delta as a Probability
Interpretation ⎊ Delta, traditionally defined as the rate of change of an option's price relative to the underlying asset's price, can also be interpreted as the approximate probability that the option will expire in-the-money.
Probability
Modeling ⎊ Probability is fundamental to quantitative finance, providing the mathematical framework for modeling asset price movements and calculating risk.