How do you use Delta hedging?

Delta hedging is a fundamental risk management technique employed by investors who trade options. The primary objective of this strategy is to mitigate the potential impact of price fluctuations on the option position.

When an investor buys or sells an option, they expose themselves to the risk of price movements in the underlying asset. To counter this risk, they engage in delta hedging by executing offsetting transactions in the underlying stock or an exchange-traded fund (ETF) that tracks the same asset.

The delta of an option represents the change in the option's price relative to a change in the underlying asset's price. By calculating the delta, investors can determine the appropriate number of shares to buy or sell to hedge their option position.

For instance, if an investor holds a call option with a delta of 0.5, they would need to buy or sell 0.5 shares of the underlying stock for every option contract they hold to fully hedge their position.

By maintaining a balanced portfolio of options and underlying shares, investors can reduce their exposure to market volatility and potentially limit their losses.