DELTA HEDGE Meaning and
Definition
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Delta hedge is an investment strategy employed by financial market participants, particularly option traders, to reduce or eliminate the risk associated with changes in the price of the underlying asset. It is based on the concept of delta, which is a measure of the sensitivity of the option's price to changes in the price of the underlying.
In a delta hedge, the trader creates a balanced portfolio that includes both the option and an offsetting amount of the underlying asset. By maintaining a delta-neutral position, the trader aims to ensure that any changes in the option's value due to changes in the underlying price are offset by corresponding changes in the value of the underlying asset position. This balancing act is achieved by adjusting the hedge position as the price of the underlying asset fluctuates.
The delta of an option can change over time as the price of the underlying asset changes, and this creates the need for ongoing adjustments to the hedge position. Traders may need to buy or sell more of the underlying asset to maintain a delta-neutral position.
Delta hedging reduces the risk of price movements in the underlying asset, but it does not completely eliminate all risks. Other factors such as volatility, interest rates, and time decay can still affect the value of the option. Nonetheless, delta hedging is a valuable risk management tool in options trading that aims to mitigate loss potential and stabilize profits by dynamically balancing the position with the underlying asset.
Common Misspellings for DELTA HEDGE
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Etymology of DELTA HEDGE
The term "delta hedge" originates from the financial industry and is derived from the Greek letter delta (Δ), which represents the change in an option's price with respect to a change in the underlying asset's price.
In options trading, a delta hedge is a technique used to manage the risk of holding an option position by offsetting it with an opposing and potentially profit-making position in the underlying asset.
