The delta traps

Delta is easy to calculate and easy to misread. Most beginners make the same mistake: they take a positive delta as a buy signal and a negative delta as a sell signal. If it were that simple, everyone would be profitable. Delta measures aggression, and aggression often loses against passive liquidity.

Here are the five traps to know, and how to avoid them.

Trap 1: delta does not see passive orders

Delta only counts aggressive orders. A patient institutional buyer accumulating with limit orders, or an iceberg refilling at the bid, does not show up as positive delta: on the contrary, every contract it buys is executed at the bid, against an aggressive seller, and therefore counted as negative delta. A very negative delta on a support that holds can therefore signal a large buyer, not winning sellers.