10-delta & 25-delta

CFA Level III Derivatives
#1

Hello,

Could someone help with the following questions?

What’s the difference between 10-delta & 25-delta, is it related to the Risk reversal?
Why 10-delta & 25-delta are more common in comparison to others deltas

Thank you!

#2

A 10-delta option is far out of the money, while a 25-delta option is somewhat out of the money.

As an example, given these data:

  • S0 = $45
  • rrf = 2%
  • T = 0.5
  • σ = 20%

Using the Black-Scholes-Merton option pricing model, a 10-delta call option will have a strike price of $55.03 while a 25-delta call option will have a strike price of $50.50. Note that in practice, they’d probably use a $55 strike call as the 10-delta call.

I don’t know why they’re the most common. Tradition, perhaps.

1 Like
#3

Thank you for your answer
Neither do I know, why 10-delta & 25-delta are most used