abhishreshthaa
Abhijeet S
Delta Hedging
This involves maintaining a delta neutral portfolio
The hedge position must be frequently rebalanced
Delta hedging a written option involves a “buy high, sell low” trading rule
Delta Neutral Portfolio
Option Delta: 0.434
Buy 10,000 x 0.434 = 4340 shares.
Cost: 4,680 x 95 = Rs 4,12,300
Performance of the Delta Neutral Portfolio
Assume that the stock price increases to Rs 100
The call price increases to Rs 6.4
The liability increases by
(6.4 – 4.2) x 10000 = Rs 22,000
The value of the stock position increases by
4200 x (100 – 95) = Rs 21,000
The change in the portfolio value is
- 22,000 + 2100 = - 1000 or a loss of Rs 1000
This involves maintaining a delta neutral portfolio
The hedge position must be frequently rebalanced
Delta hedging a written option involves a “buy high, sell low” trading rule
Delta Neutral Portfolio
Option Delta: 0.434
Buy 10,000 x 0.434 = 4340 shares.
Cost: 4,680 x 95 = Rs 4,12,300
Performance of the Delta Neutral Portfolio
Assume that the stock price increases to Rs 100
The call price increases to Rs 6.4
The liability increases by
(6.4 – 4.2) x 10000 = Rs 22,000
The value of the stock position increases by
4200 x (100 – 95) = Rs 21,000
The change in the portfolio value is
- 22,000 + 2100 = - 1000 or a loss of Rs 1000