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.
Glossar
Gamma Risk
Exposure ⎊ Gamma risk, within cryptocurrency derivatives, represents the sensitivity of an option's delta to changes in the underlying asset's price.
Options Market Makers
Framework ⎊ Within cryptocurrency derivatives, Options Market Makers (OMMs) provide liquidity and price discovery by continuously quoting bid and ask prices for options contracts.
Directional Risk
Exposure ⎊ Directional risk, within cryptocurrency derivatives and options trading, fundamentally represents the potential for financial loss stemming from adverse price movements.
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.
Sophisticated Traders
Participant ⎊ Sophisticated traders are market participants characterized by their deep understanding of financial instruments, advanced analytical capabilities, and access to significant capital resources.
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.