What Is ‘Delta Hedging’ in the Context of Options Trading?

Delta hedging is a strategy used by options market makers and sophisticated traders to reduce or eliminate the directional risk (Delta) of their option positions. It involves taking an opposite position in the underlying asset to offset the Delta of the options.

For example, if a position has a positive Delta, the trader will short the underlying asset to bring the net Delta closer to zero, making the position market-neutral.