Options – Delta Hedging

Short description

Dynamically hedging an option position (strategy or portfolio) with the underlying futures contract.

Capacity

You act in the role of an option trader. You can transact exchange-listed options and their underlying futures contract.
More specifically, you act in the capacity of initiator.

Task

Your task is to setup an option position, either long or short, either with a call only (or a multiple of it), or with a put only (or a multiple of it). Then, check the Delta position. If it is long (a positive number), then, sell an equivalent number of futures, but if the Delta position is short (a negative number), then, buy an equivalent number of futures. Then, look at the following:

First, check the P/L of your portfolio should not change significantly, when the underlying futures price changes, as you have hedged according to the Delta (Delta-hedging).

Secondly, verify whether the Delta position has exceeded (plus or minus) 1.00. if so.
If larger than + 1.00, sell one future.
If more negative than -1.00, buy one future.

This way, you dynamically apply Delta-hedging, in order to keep the value of the portfolio immune to a price change, as much as possible.

Greeks

Analyse reported number in overview to monitor the Greeks of your portfolio:

Delta (Δ)
Gamma (Γ)
Vega (ν)
Theta (Θ)
Rho (Ρ)

 

Our Labels

Entrima and Market Abuse Centre (MAC) are the two labels we operate to provide learning services for professionals in the commodity & energy markets.
 
 


Content & Context

Entrima’s mission is to transfer knowledge regarding the business, controls & operations of parties in (or relating to) the wholesale markets.

www.entrima.org


Conduct & Culture

MAC’s mission is to facilitate the prevention & detection of misconduct and to foster proper behaviour in organisations. This is achieved via training, periodic updates and increased awareness.

www.marketabusecentre.com