Monday, October 26, 2009

Delta Neutral Hedging

Delta Neutral Hedging is a concept of creating a portfolio which has a net value that is kept neutral to movements in the underlying stock price. By dynamically re-hedging an investor is able to effectively buy low and sell high. This is the concept of a good investor. Quant Principle has an excellent article discussing delta neutral hedging.

This article discusses Delta (δ) neutral hedging, and Delta (δ) neutral dynamic hedging. The article discusses the theory, the mathematics and a theoretical example. The example sets up a very simple portfolio that contains a long Call Option, and a short position on the underlying stock. The simple strategy demonstrates the concept of trading on volatility.

Finally, the article presents a brief discussion of the risks associated with Delta Neutral hedging.

1 comment:

  1. Can you explain more at following place in your article?

    "Shares Sort Will be 0.48"
    "Shares Sort Will be 0.46"

    what does it mean and how to compute the values?

    2)the entries in table (short,value)

    again, what does it mean and how to compute the values?

    Thank you