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"What Is The Difference Between Beta and Delta?"


Question By Cary Moore

"What Is The Difference Between Beta and Delta?"

How are the beta of a stock, and the delta of an option different, and how are the similar?

Asked on 13 May 2010

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Answered by Mr. OppiE

Hi Cary,

Beta of a stock and the delta of an option are similiar in the sense that both beta of a stock and the delta of an option measure the correlation of the movement of one instrument with the movement of another.

The beta of a stock measures the correlation of the price movement of the stock with the movement of the overall market. A stock with a beta of 3 is expected to move three times as much as the overall market. However, due to the fact that the beta of a stock is measured over an extremely long period of time, it does not necessarily mean that whenever the market move by 1%, the stock with beta of 3 will move by 3%. This is why beta is taken more as a measure of volatility instead of exact correlation with the market's movement. As such, a stock with beta of 3 is expected to be three times as volatile as the market, which makes it an extremely speculative stock.

The delta of an option measures the correlation of the price movement of an option with its underlying stock. An option with delta of 0.5 will move up by $0.50 if its underlying stock move up by $1.00. Unlike beta, delta is a fairly precise measure of how much an option will move with its underlying stock, adjusted for time decay. In fact, the higher the delta value, the more precise the option will move with its underlying stock. However, unlike beta, delta will never exceed 1.0. An option with delta value of 1.0 will move exactly dollar for dollar with its underlying stock and that is the most it can do. Options can never move more than its underlying stock.




In conclusion, beta and delta are similiar in the sense that they both measure correlation. However, beta is different from delta in the sense that delta is a fairly precise measure while beta is a more vague measure which measures volatility more than correlation.

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