What is Delta Hedging?
Delta hedging is a trading technique that lowers the
directional risk associated with the price fluctuations of an underlying asset.
Though, the hedge is achieved Ultimately by the use of options, the aim is
to achieve a delta-neutral position, offsetting the portfolio risk or
How does delta hedging work
Generally, when an investor buys or sells options and covers
the risk by purchasing or selling an equivalent amount of stock or ETFs, it
accounts for the most common delta hedging strategy. Trading volatility by
delta neutral trading would involve other strategies as well.
Considering that delta hedging is intended to reduce the
volatility of the price of the option compared to the movement of the price of
the underlying asset, rebalancing is continuously needed to ensure that the
risk is hedged. A complex technique used by institutional investors or major
investment firms is referred to be Delta hedging.
Delta Hedging strategies
1)Delta neutral hedging strategy
Delta Neutral refers to a strategy where the sum total of
Delta for your position is zero
Any positive or negative change in the underlying prices does
not impact such a strategy.
Options alone or any combination of futures and options can
be produced by Delta neutral strategies.
For example- A call option with Delta=0.5 would change by 0.5
units for every 1 unit change in price of underlying. The delta value is
positive for the call options, while the delta value is negative for the put
options. Delta Neutral refers to a strategy where the sum total of your delta
positions is zero.
Such strategy would not be affected by any positive or
negative movement in the underlying prices.
Delta Neutral strategies can be shaped by options alone or by
any mixture of Futures and Options.
When to apply such strategy ?
Only on expiry day after 2:30pm or election result time or
budget or news time.
A long straddle is built by purchasing the same quantity of
ATM Call and Put Options.
The Delta of call options Is nullified by the negative delta
put option, thus making this strategy delta neutral.
Choosing Call and Put option on the same strike price.
You may purchase straddles or sell them. With the same strike
price and expiry date, you buy both a call and a put option for the same
underlying stock in a long straddle. The more volatile the stock or index (the
bigger the predicted price swing), the greater the chance of a strong change
being made by the stock.
3)Intra-day Bank Nifty strategy
this strategy the trader should check Bank Nifty day high and day low at 2:00pm
trader can buy when day high has crossed and short when day low is crossed,
exit at 3:20pm or when stop loss is hit.
all Buy (day high as entry) & Sell (day low as entry) SL-M orders at 2 PM
Pros of Delta Hedging.
enables traders to hedge the possibility of a portfolio's endless price
the short term, it safeguards gains from an option or stock position while preserving
Cons of Delta Hedging.
must track and modify the positions they join on a continuous basis. The
investor will need to purchase and sell shares to avoid being under or
over-hedged, depending on the volatility of the equity.
hedging will incur high expenses, given that there are transaction costs for
each trade performed.
About Bank Nifty
Bank Nifty has immense potential to make steady gains with
weekly options. We have
a very short time span for the contact to expire in weekly options, since any
interaction begins on Friday and ends on Thursday, Delta Hedging can be applied
on both Nifty and Bank Nifty.