How Does the “Delta” of an Option Relate to Its Effectiveness as a Hedge?

Delta measures the option's price sensitivity to a one-unit change in the underlying asset's price. An option's delta ranges from 0 to 1 for calls and -1 to 0 for puts.

To create a perfect hedge (delta-neutral position) against an underlying asset, a trader must take an opposite position in options such that the total portfolio delta is zero. For example, to hedge 100 units of an asset (delta +100), one would buy 200 put options with a delta of -0.50 each.