DELTA HEDGING & GREEK NEUTRALMichael Feeley

Greeks

Options trading has become one of the most common exchange traded derivatives

In addition to the risk factors that affect stock prices, options are impacted by additional factors, such as: Time to expiration Volatility of the underlying asset Interest rate fluctuation

These factors are known as the Greeks They are used to monitor and value different

securities

Greeks

Delta measures the rate of change in the price of the option in correlation to changes in the price of the underlying security.

Vega is the measure of the instrument’s sensitivity to the volatility of the underlying asset.

Theta is the measure of the option’s sensitivity to the time to expiration.

Gamma measures the rate of change of Delta in correlation to change in the underlying price.

Rho measures the sensitivity of the option to interest rate changes.

Delta Hedging

Delta Hedging means making your position Delta neutral.

This means that as an investor you’re looking to maintain a fixed position in your investment.

In theory, delta represents the change in price for an options contract, per dollar change in the underlying.

In practical terms delta hedging is not very popular. Due to constant volatility and many affecting

factors, investors must hedge constantly for it to be effective.

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