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augieboo

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Re: augieboo post# 201

Wednesday, 06/18/2003 9:08:13 PM

Wednesday, June 18, 2003 9:08:13 PM

Post# of 241
Delta Hedge, Delta Variable, Gamma Hedge, Defined

from http://www.anz.com/edna/dictionary.asp?action=content&content=delta_hedging

A strategy used by option sellers to protect their exposure, ie, to be 'delta-neutral'. delta hedging involves taking steps to offset price/rate risk by matching the market response of the underlying asset over a narrow range of price/rate movements. (option buyers do not need to worry about delta hedging because their potential loss is limited to the outlay of an initial premium.) To structure a delta hedge, an option seller takes into account changes in the spot price, the time to expiry and the difference between the strike and spot prices. The more an option is in-the-money the greater is the amount of delta hedging. A deep in-the-money option has a delta of close to 1, or even 1, because it is likely to be exercised; a deep out-of-the money option would be close to or at zero because the option has very little intrinsic value.


Delta variable

This measures the likelihood of an option being exercised and so determines how much an option writer should hedge to be delta-neutral, ie, covered.


Gamma hedge

A hedge taken by initiating option positions to reduce the risk of change to an options portfolio's delta in response to changes in the underlying over a narrow range of price movements.





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