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Delta is one of many indicators that option pricing models are providing (Greeks). It represents the practical level for exercising an option. As a probability, it is expressed as a figure between 0 and 1. Can be also be represented as a percentage of probability.
Consider a european Call option (e.g. only exercisable at maturity). During its life, before its expiry date:
– If the forward price is below the strike price (call out of the money), the option has less than one chance out of two to be exercised at maturity: the Delta is less than 50%. In other words, the probability that the spot price at maturity is greater than the strike is between [0 and 0.5[.
– Symmetrically, if the forward price is above the strike (call in the money), we will have more than one chance out of two to have the option exercised at maturity option: Delta is greater than 50%. In other words, the probability that the spot price at maturity is greater than the strike is between ]0.5 and 1].
– Eventually, if the forward price is equal to the strike price (call at the money), we will have one chance out of two to have the option exercised at maturity: Delta will be 50%. In other words, the probability that the spot price at maturity is equal to the strike price is equal to [0.5].
Example:
Take a Call option USD / EUR Strike 1375 expiry 22/03/2012, the Garman-Kohlhagen model gives a Delta of 0.8 (e.g. 80%): This option is potentially (and highly) exercisable.
See also the article re manage a position in Delta neutral.