By Simon Gleadall , CEO of Volcube.

Delta Hedging

Check out this delta hedging video. The delta of any derivative instrument tells us the relation between its price and that of the underlying security.

In other words, for a change in the underlying price, the delta represents how much of the change will be reflected in the price of the derivative. For example, a call option with a delta of 0. This would be desirable if we did not want any exposure to changes in the price of the underlying security.

So if we own a put option, typically we might expect its value to rise and fall with falls and rises respectively in the price of the underlying product. To eliminate these fluctuations, we need to delta hedge.

Options and Delta Hedging

Specifically, when owning a put option, to delta hedge we need to buy a quantity of the underyling product. As the underlying product price rises, our put falls in value, therefore owning some of the underyling product is a hedge against this risk.

A couple of things to note. Delta hedging can be done with any instrument that has a delta with respect to the underlying product and not just the underlying product itself. Or puts can be delta hedged using call options struck on the same underlying if traded in the right direction.

Secondly, because the delta of options can be a function of many other variables, a delta hedge is usually only temporarily accurate. You can use Volcube to practise delta hedging option portfolios for yourself.

What is delta hedging? | aqasesuyohaw.web.fc2.com

You can learn how to execute delta hedges and also see how delta hedges perform under varying market conditions. Plus you can also use the Volcube auto-hedger to show you how to delta hedge, as well as watch the video on delta neutrality in the Volcube Learning environment. Starting from first principles, option gamma is explained in straightforward English before separate sections on gamma hedging, gamma trading and advanced gamma trading […].

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Delta hedging

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