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Delta Hedging in Bank Nifty December 04 2020Delta Hedging in Bank Nifty, Hedger Funds, Bank Ni

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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 option.

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.

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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.

2)Long Straddle

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

· In this strategy the trader should check Bank Nifty day high and day low at 2:00pm

· The 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. 

· Place all Buy (day high as entry) & Sell (day low as entry) SL-M orders at 2 PM and relax.

Pros of Delta Hedging.

· It enables traders to hedge the possibility of a portfolio's endless price volatility.

· In the short term, it safeguards gains from an option or stock position while preserving long-term holdings.

Cons of Delta Hedging.

· Traders 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.

· Delta 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. 

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