Explain the Concept of ‘Delta Hedging’.
Delta Hedging is an options strategy used to reduce or eliminate the directional risk associated with price movements of the underlying asset. It involves taking an opposite position in the underlying asset (or another derivative) to offset the Delta of the option position, aiming for a portfolio Delta of zero (Delta-neutral).
This requires frequent rebalancing as Delta changes.
Glossar
Portfolio Delta
Exposure ⎊ Portfolio Delta, within cryptocurrency options and derivatives, quantifies the sensitivity of a portfolio’s value to a one-unit change in the underlying asset’s price, functioning as a crucial risk metric.
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.
Delta Hedging
Framework ⎊ Delta hedging, within cryptocurrency derivatives, represents a dynamic risk management strategy designed to neutralize the directional exposure arising from options positions.
Market Maker
Agency ⎊ A market maker in cryptocurrency derivatives functions as a principal, providing liquidity by simultaneously posting bid and ask prices for contracts, notably perpetual swaps and options.
Directional Risk
Exposure ⎊ Directional risk, within cryptocurrency derivatives and options trading, fundamentally represents the potential for financial loss stemming from adverse price movements.
Options Strategy
Framework ⎊ Options strategies within cryptocurrency derivatives represent a structured approach to managing risk and generating returns, leveraging the unique characteristics of digital assets and their associated options contracts.