what is the purpose of delta hedging?

[IronFist]

I think it is something you can do. At expiration if you're outside the wings the delta goes to zero so if the fly blows out to either side your hedge should offset losses but your delta would also be constantly changing as expiration approaches so you would have to keep hedging in a way that is similar to gamma or reverse gamma scalping for those that trade long or short straddles. Theoretically if you are say just long a lot of straddles you would sell stock as the price goes up and buy stock when the price goes down trying to offset the theta loss in the position. At the moment i'm trading pretty small with a variety of one lot flies and looking to add much more capital by May. Mine are usually directional so usually on the call side have a positive delta to start with so if sold stock and the price fell towards or below my first wing this profit if the stock declined on the hedge could pay or pay for a chunk of the cost of the fly. Perhaps the strategy is better for a true directionless fly to hedge as the delta changes. Probably some more experienced fly traders who could weigh in.

The words are in English but I have no clue what you said.

 

[IronFist]

To avoid gamma extinction while capturing as much juicy Theta as you can take down while throwing a vol crunch party

Perplexing.

 

[destriero]

My long term plays are generally SN short vols, short price. Flattening deltas is unavoidable. Dynamic hedging is not position repair. Getting short 30K vols and short 2K deltas is the structure you chose at the outset. It's called self preservation.

It's the clowns that only short puts or roll passive positions for loss avoidance that are a stain on the industry.

 

[taowave]

yeah,i double taked on that one....

Delta hedging allows one to work through and derive the pricing models for option

What? Lol. This is pure entertainment

 

[qlai]

It's the clowns that only short puts or roll passive positions for loss avoidance that are a stain on the industry.

What industry is that - options trading?

 

[traider]

In the Black-Scholes model with GBM, an option can be replicated exactly by delta-hedging the option. In fact the Black-Scholes PDE we derived earlier was obtained by a delta-hedging / replication argument.

 

[Aquarians]

I see things about if a position is losing, you buy something else such that deltas are even. Like if your delta is -400, you go over one strike and sell enough that the delta of your position is around 400.

What does that do?

In the Black-Scholes model with GBM, an option can be replicated exactly by delta-hedging the option. In fact the Black-Scholes PDE we derived earlier was obtained by a delta-hedging / replication argument.

I'm gonna try explain how it works. Think of classic arbitrage: you buy a stock with $10 on some exchange and at the same time sell it with $15 on another exchange. You make $5 risk-free. Conversely you may short a stock for $15 and buy it simultanously from elsewhere at a price of $10.

This is exactly how delta-hedging works.

We're talking two instances of the same product here:

1) The real option that you buy or sell on the options market.
2) A "virtual", exactly-the-same price and characteristics option that "replicates", "clones", however you wanna call it, "emulates" #1.

So two cases:

a) The bid price for the option on the real exchange is $15, hence you can sell it for $15 but the "theoretical fair value" (average price) you would get through delta-hedging for the same options is $10.

In this case you sell the real option for $15 and start constructing a virtual portfolio which by all practical purposes behaves as if you would have bought the very same option. You "delta-hedge", meaning you sell and buy stock in various quantity throughout the life of the option and magically, at the end the virtual portfolio will have cost you on average only $10. So you capitalized on an arbitrage: sold the real option for $15 and "bought it" for $10, leaving you with $5 - ON AVERAGE!

b) The ask price for the option on the real exchange is $10, hence you can buy it for $10 but the "theoretical fair value" (average price) you would get through delta-hedging for the same options is $15.

In this case you buy the real option for $10 and start constructing a virtual portfolio which by all practical purposes behaves as if you would have sold the very same option. You "delta-hedge", meaning you buy and sell stock in various quantity throughout the life of the option and magically, at the end the virtual portfolio will have made you an average $15. So you capitalized on an arbitrage: bought the real option for $10 and "sold it" for $15, leaving you with $5 - ON AVERAGE!