← AdvancedLesson 8 · 3:43
What is delta hedging?
Summary
You can delta hedge a bought call by selling shares short so the position's delta is zero, and rebalance as delta changes. You can explain why the hedged result follows the size of the moves rather than their direction, and why market makers hedge.
Key terms
- selling short
- Selling shares you borrowed, so you gain when the price falls and lose when it rises.
- delta hedging
- Holding shares against an option so the combined delta is zero and the position has no bet on direction.
- gamma
- How fast delta changes as the stock moves; it grows sharply near expiry around the strike.
- rebalancing
- Resetting a delta hedge by buying or selling shares as the option's delta changes.
- market maker
- A firm that quotes a bid and an ask price all day and hedges the options it ends up holding.
Check yourself
Answer each question to see why the right answer is right.
1. You own the XYZ $100 call with a delta of 52. How do you delta hedge it?
2. Hedged, XYZ rises $1 and you keep $2. If it falls $1 instead, you keep $2 again. What causes this?
3. XYZ climbs to $105 and the call's delta grows to 73. You are still short 52 shares. What do you do to stay hedged?
4. The example week made $16, its mirror image (down first, same size moves) made $18, and a quiet week lost $28. What decides the hedged result?
5. If you sold the call instead and hedged it with shares, which weeks would earn?
Finished the video and the quiz? .