Delta Hedging
Categories: Derivatives, Trading, Investing
The gaming industry has developed numerous strategies for hedging bets in roulette, craps, poker, and others. (Think: more ways for the casino to make money.) Essentially, when you hedge bets, you place bets on opposing outcomes to mitigate losses if you're wrong. Conversely, you don’t win as much if you're right, but small gains vs. small losses are preferable to big losses.
The options trading arena has developed its own mathematical offset bet system, categorized as delta hedging. The strategy incorporates offsetting premiums to make a trade close to delta neutral until a direction is established sufficiently to warrant closing out the hedge and riding the trending direction to maximize gains.
Going long both a call and a put from the same series creates a delta neutral scenario. Other techniques may incorporate shorting stock against long option positions, using a combination of deep in the money and out of the money opposing calls and puts, and other permutations. Given the volatility of stock options, the daily and hourly erosion of time value, and other factors that can affect the trade, close monitoring on a minute-to-minute basis is often required to be successful.
Think: delta=change. So if it's hedged, the change is...less.
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Finance: What is a Derivative?23 Views
finance a la shmoop what is a derivative? well it's derived it's a something taken
from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]
hunger is well you know crankiness that's diva thing you get there...
derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah
yeah discount double shmoop yeah look for it be on there with aaron
and a derivative of a stock or bond or other security is a something which
derives its value based on the performance of that underlying security
there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]
sell a security at a given price over a given time period and a call option, ie
right to buy a security at a given price over a given time period
well the price of that option is derived from the price of the security and a few
other factors like strike prices and duration and all that stuff
colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]
for 25 bucks a share a derivative of its share price is sold in the form of a
call option with a $30 strike price expiring about 90 days from now on the
third Friday of the end of that month well investors pay a price albeit
probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]
electric at any time in the next 90 ish days until that option expires making the bet
that the stock will go well above 30 bucks a share in that time period that
call option is thus a derivative of the colonel electric primary stock price got
it if you really want to get personal well here's the ultimate form of
derivative [Baby laying down]