Delta: True or False

Lenchick’s statements are correct. sparty419 Wrote: ------------------------------------------------------- > Calls: Hedge ratio decreases (-1/delta)-> less > calls needed to hedge -> SELL calls (Because delta > increases) > NO. Buy since your original position is SHORT CALLS, so you need to DECREASE that position, i.e., FEW SHORT --> BUY. > > Underlying Price Decreases > > Calls: Hedge ratio increases->more calls needed to > hedge -> BUY calls (because delta decreases) > AGAIN. SELL since your original position is SHORT CALLS, so you need to INCREASE that position, i.e., MORE SHORT --> SELL more calls. > > I don’t get one thing though. Don’t puts have > negative delta? So, if price of stock decreases, > then put delta moves towards 0 from a negative > number and so don’t you need to BUY more puts? > > For example: if put delta is currently -.5, > therefore hedge ratio is -1/-.5 = 2 > If price falls, put delta would be -.2, and > therefore hedge ratio is -1/-.2 = 5 and hence BUY > puts??? > No. when price falls, your put delta gets MORE NEGATIVE, toward its max value of -1, i.e. from -.5 to, say, -.7 so your hedge ratio go from -1/-.5 = 2 to -1/-.7 = 1.43 thus fewer puts required, thus you need to SELL puts.

u da man elcfa

the last two graphs on this page are excellent visuals for Price / Option delta relationship. http://www.optiontradingtips.com/greeks/delta.html