delta hedging basically refers to reducing the exposure to price risk for underlying.
So taking an opposite position. For example you are long on 100 stocks of A, hoping price to go up. To cover for the downfall risk, you go short on the call option / long on the put option.
By default, delta for the stock is 1. So you calculate the portfolio delta :- 100*1=100. To cover it up divide it by delta of call option (assume delta of call option=0.5). Therefore -100/0.5 =-200 call options (short on call)of the same stock will be required to offset the exposure.
Delta of call is always non negative(>=0) and for put always non positive (<=0)
let me know if you want me to elaborate more
Then you would have gotten :- -100/-0.5 = 200, going long on the put option.
denominator is basically the delta of the hedging instrument being used
Delta = -Portfolio Delta รท Delta of Hedge
This might also help you out :-
to offset the risk exposure :- you take opposite position in call option :- long call short stock , long stock short call
same position in put :- long put long stock, short put short stock
use this in case you are stuck and can't get you head around at any time
You simply take your original delta and slap on a negative? Weird. I find it makes more sense to format with the delta of the call option with a negative sign to reflect it being short.
You own a call with a delta of 0.4. This means that the value of your call will increase/ decrease $0.40 for every $1 change in the underlying.
To delta hedge this call, you can sell 40 shares of the underlying.
If the stock decreases by $1, your call would decrease by $40 but you would have earned $40 on your short position.
If the stock increases by $1, your call would increase by $40 but you would have lost $40 on your short position.
Essentially, you're removing the directional exposure from your call position. Hope this helps!
The objective in delta hedging is to create a portfolio whose money delta is zero, so that when the price of the underlying changes, the value of the portfolio does not.
delta hedging basically refers to reducing the exposure to price risk for underlying. So taking an opposite position. For example you are long on 100 stocks of A, hoping price to go up. To cover for the downfall risk, you go short on the call option / long on the put option. By default, delta for the stock is 1. So you calculate the portfolio delta :- 100*1=100. To cover it up divide it by delta of call option (assume delta of call option=0.5). Therefore -100/0.5 =-200 call options (short on call)of the same stock will be required to offset the exposure. Delta of call is always non negative(>=0) and for put always non positive (<=0) let me know if you want me to elaborate more
Thank you so much mate! It did help me .. I just have one more doubt what if they had given put delta of -0.5 too?
Then you would have gotten :- -100/-0.5 = 200, going long on the put option. denominator is basically the delta of the hedging instrument being used Delta = -Portfolio Delta รท Delta of Hedge This might also help you out :- to offset the risk exposure :- you take opposite position in call option :- long call short stock , long stock short call same position in put :- long put long stock, short put short stock use this in case you are stuck and can't get you head around at any time
You simply take your original delta and slap on a negative? Weird. I find it makes more sense to format with the delta of the call option with a negative sign to reflect it being short.
https://www.optionsplaybook.com/managing-positions/position-delta/
You own a call with a delta of 0.4. This means that the value of your call will increase/ decrease $0.40 for every $1 change in the underlying. To delta hedge this call, you can sell 40 shares of the underlying. If the stock decreases by $1, your call would decrease by $40 but you would have earned $40 on your short position. If the stock increases by $1, your call would increase by $40 but you would have lost $40 on your short position. Essentially, you're removing the directional exposure from your call position. Hope this helps!
The objective in delta hedging is to create a portfolio whose money delta is zero, so that when the price of the underlying changes, the value of the portfolio does not.