Delta Hedging

I used to think this was simple, but there appears to be many variations of the formulas. Please add and desccribe relevant formulas to this thread, or correct any inaccuracies: 1) General: delta = change in call price/change in underlying stock 2) # of calls to purchase = 1/delta x value of position Then there is also a formula for the number of shares to purchase/sell to adjust the hedge. And then there is a delta section for exchange rates and put options: delta = P1 - P0/E1-E0. This has been a challenging section for me so any help/guidance is appreciated.

jimmylegs Wrote: ------------------------------------------------------- > 2) # of calls to purchase = 1/delta x value of > position > two problems in your formula. (and the negative sign) # of calls to “sell” = “-” 1/delta x ("# of stocks")

WHat does # of stocks mean? I’m assuming its just the value of the position divided by share price?

yes, number of shares

So you have 10 shares. A call option has a delta of 0.5 You sell 20 calls. I remember this by the fact there are always more options than stocks and calls go up in value if the price goes up.

And if the delta increases you either have to sell shares or buy more calls, is that correct?

I mean sell more calls. Sorry

No. For example, stock rockets in value, so stock and call are pretty much the same thing. Delta is then 1. You need to have 1/1*10 call options = 10, but at the moment you have sold 20 call options, so you therefore need to buy 10 call options to delta hedge.

I’m so screwed up on this section.

Does any boddy see the answer for the Mock exam. I took, it only give me overall feeback. Is it the way it suppose to be?