Delta Hedge is a risk management strategy employed in options trading to mitigate the directional price risk associated with an options position. This is achieved by offsetting the options exposure with an opposite position in the underlying asset, aiming for a neutral delta.
Mechanism
Delta, a sensitivity measure, quantifies an option’s price change relative to a unit change in the underlying asset’s price. A delta hedge continuously adjusts the quantity of the underlying asset held to counteract fluctuations in the options portfolio’s aggregate delta. This process demands frequent rebalancing as market variables, such as underlying price and time to expiration, modify the option’s delta.
Methodology
This strategic technique is critical for market makers and institutional traders to control risk from options portfolios. By maintaining a delta-neutral position, participants seek to derive profits from other market factors, like time decay or volatility changes, rather than from directional price movements. Automated systems frequently execute delta adjustments to maintain the desired risk profile in dynamic crypto options markets.
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