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Delta Hedging: Strategies Utilizing Delta

One method of utilizing delta for portfolio management is hedging. Delta hedging can reduce directional risk for a stock position by lowering the overall delta. A hedged position utilizes options to decrease the risk associated with the price movement of a stock. Utilizing long puts or short calls Say I am holding 100 shares of stock A. This means the delta of the position is 100, because every $1 increase in the stock means I profit $100 ($1 profit /share *100 shares). Let's say I am expecting growth in the long term, but I am short for the near future. In order to reduce the potential losses I am expecting, I can open a short call position or a long put position, which both have negative delta. Let's say I sell one OTM covered call, with a delta of -30, utilizing my 100 shares. This decreases my overall delta for Stock A to 70. The initial 100 Delta from the 100 shares - the 30 delta from the short call and I get an overall delta of 70. By selling the OTM covered call, I reduced my overall delta for the position, and reduced short term downside.

This is an example of a partial hedge using delta.


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