Delta hedging

(1) The strategy consists in using the delta of the option as the hedge ratio to create a virtually risk-free portfolio. Thus, a trader in a short position on n number of call options multiplies this number by the delta of the option to determine the number of underlying shares to be acquired. The purchased shares balance the portfolio that is now in a delta-neutral position so that its value is maintained even if the share price changes slightly. Since the delta varies constantly with changes in the price of the underlying and the term remaining until expiration, the number of shares held must continually be adjusted to maintain the hedge in a delta-neutral position. (2) In the same way, delta hedging can also be used to hedge the risk associated with a position in an asset by buying or selling options on that asset. Thus, an investor who owns n number of shares may obtain a delta hedge by buying a sufficient number of put options with the same shares as the underlying, equal to the number of shares held divided by a hedge ratio that corresponds to the delta of the option.