Delta Hedging Explained | Options Trading Lesson

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Delta hedging is a technique used by options and stock traders to reduce the directional risk of a position. The goal of delta hedging is to bring a position's delta closer to zero.

In this video, you'll learn:

1. What is delta hedging?
2. Trading strategies for hedging strategies with positive deltas
3. Trading strategies for hedging strategies with negative deltas

To support these points, you'll see real trading examples of the implementation of delta hedges:

1. Long puts against long shares of stock
2. Long calls against short shares of stock tastytrade, Inc. (“tastytrade”) has entered into a Marketing Agreement with Project Finance(Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade and/or any of its affiliated companies. Neither tastytrade nor any of its affiliated companies is responsible for the privacy practices of Marketing Agent or this website. tastytrade does not warrant the accuracy or content of the products or services offered by Marketing Agent or this website. Marketing Agent is independent and is not an affiliate of tastytrade.

[corporate-fugitive]

Level II candidate here. This is fantastic.

[DrDanMD]

Awesome clinic thank you for the valuable information

[vijayanand]

You have not included the theta decay into consideration in case of option buying.

[kevinguetens]

Thanks for your video on explaining Hedging, Chris. Really helpfull.

[khushithakkar]

Thank you very much, you've solved all my confusions
God bless you

[kch]

So if we are fully hedged.. What money do the trader make if he is short calls? Is it the premiums?

[znfqqsi]

Nice presentation. Easy to understand.

[bhabesh]

Is there an advantage to hedging half your delta exposure on long stock with long puts vs simply owning half the shares?

[mahmoudosmanactor]

Curious - a delta neutral position would be 0 - what is the benefit in that? If your delta position were to be 0, how do you profit with the movement of the stock price? From other extrinsic factors (IV, time decay [if you are selling premium])? I can only see this as a benefit perhaps on the short side. Or because delta changes so much, you are trying to get as close to 0 as possible to mitigate a big move knowing that delta will change - in other words, hedging the a big movement in delta. Not sure if this question makes sense.

[zincoxide]

Really enjoyed this video - I'm new to the topic so wanted clarification on the numbers calculated @8:08. At the lowest point, the stock drops by around $25. You correctly show a loss of ~$12500 (500 * 25) for the long position but show an increase of over $8000 on the Puts. How did you calculate the Puts? It looks like you calculated based on the Net Delta Position (325 * 25) as opposed to the Position Delta of the Put (175 * 25)???

[darpanpatel]

Very good knolodge who does not know about stock market

[adgvk]

hi, i m from india & want to start delta in american market...what should i do...

[swanson_]

Is delta hedging necessary for a portfolio with only credit spreads or any other defined risk set ups? Would going long VIX while keeping other bullish trades on be reasonable?

[emmanuelameyaw]

Do you hedge using a stock or an option in delta-hedging or both?

[kkopernik]

Im confused-What is a Short Stock.Long Stock? how can you enter a short stock (or is this when the stock is already losing money)

[Morann]

Why would one hedge their delta instead of just taking a smaller position size to begin with?

[Janlaxle]

you forgot to mention that the only reason to delta hedge - if you sold option

[jsun]

If you hold net 0 delta through a combination of longs and puts, will you always end up with a $0 profit at the expiration of the puts?

[ot]

@6:25 Why would you only hedge half of the position ie why not go long 3700 shares and sell an extremely far, long dated out of the money call? If you do so, your net delta would be zero (delta neutral) but you would make a gain from time decay, that way you are risking nothing, but still profiting.

[moisesvelez]

Maybe I'm missing something, but if you're going to hedge to try and reduce your losses by 50%, why not just buy half the amount of stock because you're only going to make 50% of whatever profit you make anyways. Why go through all of this trouble?