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The fraction of a point by which the price of an option contract is expected to change in response to a one-point change in the price of the underlying instrument. Mathematically, the first partial derivative of the option price with respect to the underlying price. If its neutral hedge ratio is 0.5, an option contract should change in price by about $.50 per underlying unit for each $1.00 change in the price of the underlying. This relationship is the primary basis of risk management with instruments with option payoff patterns. Of course, higher derivatives such as gamma and other relationships also must be monitored and evaluated in an effective risk management program. Also called Delta (1) (diagrams), Hedge Ratio. See also Delta/Gamma Hedge, Hedge, Stock Equivalent (2).
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