Am I correct in saying that to delta hedge a stock portfolio, you must own Delta x Portfolio Value in stocks and to delta hedge currency it’s 1/Delta x portfolio value? For example, $1,000,000 in stocks and you want to delta hedge it and delta is .50 with option price at $5.00 for 100 shares. So you would buy $500,000 / $5 x 100 = 1,000 options? But for currency hedging you go 1 / 0.50 = 2.00, so you would have twice the number?
you need to know the stock price.
Right… but essentially for currencies you use (1 / Delta) and for stocks you use Delta? I’ve noticed that there’s an inverse relationship between delta and the number of currency options you would need where as with stocks, the delta and number of stock optins is directly related. For example, For Stocks Delta Hedging: Decrease in Stock Price = Decrease Delta = Decrease In # of options required For Currency Delta Hedging: Decrease in Currency = Decrease Delta = Increase In # of options required Not sure if any of this makes sense but saw a question in Exam #3 in Schweser that completely through me for a loop.
for each share of stock, short 1/delta of call options to form delta hedge. stock price decreases, delta decreases, so either sell stocks or short more calls. it’s the same for currency. but one may normally hold (-1/delta) of puts to form a hedge position.
it is always 1/delta
put has negative delta
PJStyles Wrote: ------------------------------------------------------- > Am I correct in saying that to delta hedge a stock > portfolio, you must own Delta x Portfolio Value in > stocks and to delta hedge currency it’s 1/Delta x > portfolio value? > > For example, $1,000,000 in stocks and you want to > delta hedge it and delta is .50 with option price > at $5.00 for 100 shares. So you would buy > $500,000 / $5 x 100 = 1,000 options? > > But for currency hedging you go 1 / 0.50 = 2.00, > so you would have twice the number? hey PJ where did you see the value times delta cause I remember seeing this too and it is completely confusing me since CSK said it is always 1/delta? -thanks.
I’m going to review this whole topic tomorrow… feeling frustrated with this delta hedging even though just a few days ago I had this down pat… GRRR!!! So for both stock and currency hedging we always use 1/Delta? Could have sworn there were questions where we didn’t do that… hrm…
^^ i agree i swear I saw something like that too I think there must have been something else going on.
Figured it out… If they ask you to figure out how many shares of a stock you should own when delta hedging, you multiple the Delta by the # of options you’re holding. However, if you want to know how many options you should buy to delta hedge a stock position, take the inverse (1/Delta) and multiply by the # of shares you own. I knew I saw it done both ways 
for both stock and currency you should use 1/delta I guess…