How Does “Delta Hedging” Work for Options Traders?
Delta Hedging is a strategy used to reduce or neutralize the risk associated with price movements of the underlying asset. A trader maintains a "delta-neutral" position by taking an offsetting position in the underlying asset (e.g. buying or selling the stock) based on the option's delta value.
This requires frequent rebalancing as the option's delta changes (gamma risk).
Glossar
Underlying Asset
Foundation ⎊ The concept of an Underlying Asset, within cryptocurrency derivatives and financial markets, establishes the core reference point for valuation and risk transfer.
Options
Hedging ⎊ The primary strategic application of these instruments, allowing market participants to offset potential adverse price movements in their underlying crypto holdings.
Rebalancing
Process ⎊ Rebalancing is the systematic process of adjusting the weights of assets within a portfolio to restore a target allocation or risk profile, a necessity in the dynamic world of derivatives.
Delta
Sensitivity ⎊ Delta represents the first-order derivative of an option's price with respect to the underlying crypto asset's price, quantifying the theoretical change in the option's value for a one-unit change in the underlying.