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The document discusses delta-neutral positions in trading, specifically using General Electric's put options as an example. It explains how delta hedging works to protect gains by offsetting directional risk through buying or selling shares of the underlying stock. Additionally, it introduces delta-gamma hedging, which combines delta and gamma strategies to further mitigate risk associated with price changes in the underlying asset.

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5 views1 page

Save 5

The document discusses delta-neutral positions in trading, specifically using General Electric's put options as an example. It explains how delta hedging works to protect gains by offsetting directional risk through buying or selling shares of the underlying stock. Additionally, it introduces delta-gamma hedging, which combines delta and gamma strategies to further mitigate risk associated with price changes in the underlying asset.

Uploaded by

befinanceconsulting
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Let's assume a trader wants to maintain a delta-neutral position for investment in the stock of

General Electric. The investor owns or is long one put option on GE. One option represents 100
shares of GE's stock.

The stock declines considerably, and the trader has a profit on the put option. Then, recent events
push the stock's price higher. However, the trader sees this rise as a short-term event and expects
the stock to fall again. As a result, a delta hedge is put in place to help protect the gains in the put
option.

GE's put option has a delta of -0.75, also known as -75.. The investor establishes a delta-neutral
position by purchasing 75 shares of the underlying stock. At $10 per share, the investor buys 75
shares of GE at a cost of $750 in total. Once the stock's recent rise has ended or events have
changed in favor of the trader's put option position, the trader can remove the delta hedge.

How Does Delta Hedging Work?


Delta hedging is a trading strategy that involves options. Traders use it to hedge the directional
risk associated with changes in the price of the underlying asset by using options. This is usually
done by buying or selling options and offsetting the risk by buying or selling an equal amount of
stock or ETF shares. The aim is to reach a delta-neutral state without a directional bias on the
hedge.

Can You Use Delta to Determine How to Hedge Options?


Yes, you can use delta to hedge options. In order to do this, you must figure out whether you
should buy or sell the underlying asset. You can determine the quantity of the delta hedge by
multiplying the total value of the delta by the number of options contracts involved. Take this
figure and multiply that by 100 to get the final result.

What Is Delta-Gamma Hedging?


Delta-gamma hedging is an options strategy. It is closely related to delta hedging. In delta-
gamma hedging, delta and gamma hedges are combined to cut down on the risk associated with
changes in the underlying asset. It also aims to reduce the risk in the

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