For delta hedging currencies, you buy puts. Puts deltas range from 0 to -1.
For delta hedging stocks, assuming you sold naked calls, you buy stocks to cover yourself. Call deltas range from 0 to 1.
And I know the formula for Delta = Change in Option Prem / Change in Underlying
I know that much and yet for some reason whenever I do a question, I get mixed up as to what I should be multiplying. Are the formulas for DH for these 2 scenarios the same? Can someone explain an easy way to remember how to solve for # of contracts or # of underlying (stock) you need to puchase to maintain the hedge? It seems that formula I have above isn’t very helpful in these scenarios.
You have it all right, very clear. In general, just multiply delta by the change in price. It’ll come to you.
Thanks, the more I think about it, the more I can make sense of it.
Knowing the delta of a call (prior to expiration) must range from 0 to 1, that implies the # of stocks you need to remain delta hedged is LESS than the # of calls. If delta were 1, then it becomes a 1 for 1 relationship. Knowing that, I can tell myself:
of shares = Delta x # of calls
solve for either shares or calls. And the same applies to FX hedging but delta puts range between 0 and -1. # of “shares” in this case is # of currency units, which is the amount you want to hedge / size per contract