Course: Options and Strategies
Lesson Insights
Delta hedging is a strategy used in options trading to mitigate the risk associated with the price movements of the underlying asset. In this strategy, an options trader seeks to offset the risk of price changes in the underlying asset by adjusting the delta value of their option position.
Delta is a measure of the rate of change in the option's price relative to the price of the underlying asset. If an option has a delta of 0.5, for example, a $1 move in the underlying asset will cause a $0.5 move in the option's price.
Delta hedging involves continuously adjusting the delta value of an option position by either buying or selling the underlying asset. If the price of the underlying asset moves up, the trader will sell some of their position in the asset, thus reducing their delta exposure. Conversely, if the price of the underlying asset moves down, the trader will buy more of the asset to increase their delta exposure.
Delta hedging can help options traders to limit their exposure to the price movements of the underlying asset and to manage their risk more effectively. However, it is important to note that delta hedging can also involve significant costs, such as transaction fees, and can be difficult to execute effectively in rapidly changing markets.
The calibration of Straddle and Strangle strategies are shown in this lesson.
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