How Does the Selection of the Strike Price Affect the Hedge’s Effectiveness?

The strike price selection is critical for the hedge's effectiveness. Choosing an at-the-money strike price (equal to the spot price) creates a hedge with a delta closest to -1.0, providing the most immediate and perfect offset.

Choosing an out-of-the-money strike makes the hedge less effective initially (delta closer to zero) but may reduce the initial premium cost. The strike determines the price level at which the synthetic position's payoff is centered.