Delta is usually introduced as how much an option’s price moves for a 1-point move in the underlying. It is also a hedge ratio: it tells you how many shares an option position behaves like.
Position delta
Multiply delta by the number of contracts and the lot size. If one lot is 100 shares and a call has delta 0.40, one long call behaves roughly like owning 40 shares. Ten of them behave like 400 shares.
Using it to hedge
If you hold 1,000 shares and want to reduce your exposure by half, you need option positions with about -500 deltas, for example puts with delta -0.50 covering 1,000 shares.
Delta changes
- Gamma changes delta as the price moves, so a hedge that is right today may be off tomorrow.
- Delta also drifts with time and volatility.
- Check position delta regularly instead of setting it once and forgetting it.
This article is for education only and is not financial advice. Options involve risk and are not suitable for every investor.