Delta and delta hedge
In this lesson, you'll learn what delta is and how to use a delta hedge to protect your investment portfolio from share price movements. Delta measures how an option's value changes when the underlying share price changes—it's one of the most critical concepts in the Black-Scholes model.
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In this lesson
- 0:00 Delta and the Greeks explained
- 1:15 Constructing a delta hedge formula
- 1:39 Delta hedge calculation worked example
- 2:10 Offsetting gains and losses in practice
About this lesson
A delta hedge lets you offset this risk by selling the right number of call options, so that gains and losses cancel out exactly. You'll work through the practical formula: divide your number of shares by delta to find how many call options to sell. We walk through a concrete example where an investor with 150 shares and a delta of 0.25 needs to sell 600 call options to create a perfect hedge. When the share price then moves, the loss on your shares is matched precisely by a gain on the call options you've sold, leaving you with no net loss or gain. This technique is essential for Advanced Financial Management and risk management in the workplace—it shows how professionals protect themselves from market volatility without guessing which way prices will move.
Duration: 3m
Transcript
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