Delta Hedging | Options Strategies

The delta of an option is the sensitivity of the price of an option contract (premium) to the price of the underlying. If a stock’s price changes by 5% while its call option’s price changes by only 4%, the option’s delta would be 0.8 (4/5).

The delta of a call option increases as it moves from out-of-the-money to in-the-money, while it’s the opposite for puts.

Using multiple positive-delta and negative-delta positions to build a portfolio that has 0 delta overall is known as a delta-neutral strategy. You would desire such a portfolio for hedging purposes.

Say you have invested in a stock for the long term, but are worried about that stock declining in the short term. You can choose to delta-hedge that position by buying the right set of put options, which will keep you protected from any adverse movement in the short term.

A delta-neutral portfolio does not expose you to changes in the underlying instrument, while still allowing you to profit off the implied volatility or time decay of its options. We talked about implied volatility yesterday, remember?

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None of the above stock ideas are intended as recommendations. Please consult a registered advisor before buying/selling.