Options & Derivatives

Delta Hedging

Offsetting an option's directional exposure by holding delta units of the underlying.

Sell a 0.6-delta call, buy 0.6 shares. Small moves now leave the position roughly unchanged.

The hedge goes stale because gamma changes delta as the market moves, so hedging is a continuous process. Rehedging frequency trades transaction costs against hedge error; desks use delta bands rather than a clock.

What remains after hedging is the intended position: gamma, vega and theta - a bet on realised versus implied volatility.

The interview answer: yes, you can lose money on a perfectly delta-hedged position, because direction is not the risk you kept.

Full guide

Delta Hedging Explained

How a market maker removes directional risk from an options book, and why the hedge must be continuously adjusted.

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