Chapter 05 · Section 5.1
Delta Hedge
How many put option contracts would the hedger need to establish a delta hedge on his long position of 100 shares? Suppose that the Delta factor of the put is -0.5.
a) 0.5
b) 1
c) 2
The Delta factor approximates the change in the premium subsequent to a one unit change in the value of the underlying.
The aim of the Delta hedge is to offset gains or losses on movements in the price of the underlying with losses or gains in the option premium.
A decrease in the value of the underlying makes the put more valuable. An increase in the value of the underlying makes the put less valuable.