What Is a Hedge Ratio?
Hedging ratio is usually expressed by delta value, which is a rate of change that can show the effect on the option price when the price of the relevant asset changes. The delta value of the call option is positive (range between 0 and +1), because when the stock price rises, the price of the call option also rises. The delta value of a put option is negative (range between -1 and 0) because when the stock price rises, the price of the put option decreases. The delta value of the equivalent call option is close to 0.5, while the equivalent put option is close to -0.5.
Hedge ratio
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- Chinese name
- Hedge ratio
- Foreign name
- Delta
- Category
- ratio
- Content
- Hedge
- Hedging ratio is usually expressed by delta value, which is a rate of change that can show the effect on the option price when the price of the relevant asset changes. The delta value of the call option is positive (range between 0 and +1), because when the stock price rises, the price of the call option also rises. The delta value of a put option is negative (range between -1 and 0) because when the stock price rises, the price of the put option decreases. The delta value of the equivalent call option is close to 0.5, while the equivalent put option is close to -0.5.
- Hedging ratio is usually expressed by delta value, which is a rate of change that can show the effect on the option price when the price of the relevant asset changes.
- When an option marketer provides liquidity in the market (that is, he is responsible for opening the buying and selling price of an option series), if a market counterparty appears, he will hold a position in the contract. For example, when an opponent buys a call option contract from him, it is as if he has a short position in the call option. However, because his purpose as a bookmaker is not to bet against his opponent, he needs to hedge his positions. At this point, he has to determine how many stocks he needs to buy (because the risk of holding a short position is the rise in the stock price) for hedging purposes. Delta is one of them to help him calculate the risk of hedging.
- Assume that the Delta value of the short position of the call option held by the bookmaker is -0.5. To hedge the position with Delta Neutral, you need to buy a stock with a Delta value of +0.5. In other words, he must hedge 1 lot of stocks for every 2 options (because the Delta value of the stocks is +1).
- Of course, as the aforementioned Delta value will continue to change as the stock price changes, such hedging must be adjusted at all times. If the delta value of the call option also rises when the underlying price rises, the number of underlying shares to be bought also needs to be adjusted upwards. Conversely, if the underlying price falls, the delta value of the call option will decrease, and the number of underlying shares to be purchased also needs to be reduced accordingly.
- In addition, when holding an option portfolio, investors must understand that its Delta value is equal to the sum of all constituent option series. The delta value is not a constant. Its value is between -1 and +1. The actual delta value will also change depending on factors such as related assets, volatility, interest rate and time to maturity. Therefore, when investing After buying or selling an option contract, one must keep a close watch on the change in the overall Delta value of the held option portfolio. When hedging is needed, adjust the number of stocks to avoid over-hedging or incomplete hedging.