Delta hedging

Definition

Delta hedging in plain English

If you know an option gains or loses value as a stock moves (its delta), you can cancel out that exposure by taking an opposite position in the stock itself. That's delta hedging: you buy or sell just enough shares so that a small move in the stock leaves your total position roughly unchanged — the option's gain is offset by the stock's loss, or vice versa. It's like walking the wrong way on a moving walkway at just the right speed to stay in one spot. Traders do this constantly to isolate other bets (like on how wildly the stock swings) without getting whipsawed by the stock's basic up-and-down direction.

Learn these first

• Coupon rate
• Par value

Related Principles of Finance terms

• Accrued interest
• Allocation effect
• Basis
• Basis point
• Benchmark
• Bond-equivalent yield (BEY)
• Bootstrapping
• Callable bond
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• Comparable company analysis (comps)