Delta Hedging

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.