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Yes, in general if you expect the stock to be more volatile it makes sense to hedge with puts. Because you get to keep all your shares if there is a big move up. On the flip side if there is a big move down the delta will increase on the puts as they get further into the money. If you look at any option chain, the deeper in the money options have the highest delta. that will work in your favor if the stock moves volatily. So it usually makes the most sense to hedge with puts when you expect big moves, And sell shares if you expect a slow fall. But you also have to factor in option price which is another paragraph I would have to type out
@@jeffe.8756 I'm not really sure where you can find more information on this to be honest. Maybe try googling option hedging? Most of what I know is just from trial and error, watching option behavior, and some miscellaneous research. I watched and researched options for like a year and a half before I ever made any trades on them. If you have any questions feel free to ask me. I like explaining these kind of things, it's helpful for myself to look at my own thought processes and typing it out helps me do that
Thank you! I just spent a ton of time creating an Options Trading for Beginners PDF (170+ pages now) that includes my best explanations/visuals explaining key options trading concepts and strategies. Check it out: www.dropbox.com/scl/fi/g7d402wnapqexq344ct73/options-trading-for-beginners-aug15-v1.pdf?rlkey=dort61xyaz1rubndbwbqmhd5i&dl=0 If you want updates to the PDF over the coming months/additional learning resources, consider dropping your email on the page here: geni.us/options-trading-pdf
Curious - a delta neutral position would be 0 - what is the benefit in that? If your delta position were to be 0, how do you profit with the movement of the stock price? From other extrinsic factors (IV, time decay [if you are selling premium])? I can only see this as a benefit perhaps on the short side. Or because delta changes so much, you are trying to get as close to 0 as possible to mitigate a big move knowing that delta will change - in other words, hedging the a big movement in delta. Not sure if this question makes sense.
Mahmoud, Delta-neutral positions typically benefit from time decay (the decrease in an option's extrinsic value as time passes), which is only applicable to short premium trades (as you've mentioned). However, other delta-neutral trading strategies include gamma scalping (a good read on this topic here: www.randomwalktrading.com/practical-gamma-scalping/). I hope this helps! -Chris
had the exact same Q , if you are delta neutral , how do you make money . for example if you are bullish on a stock and sell put options , the way to hedge its delta is to go bearish on SPY and may be do a short call . so if the mkt turns either direction you are loosing on one while gaining on the other keeping it no profit no loss situation .from ive tried to find out , my understanding is if the mkt turns in either directions and you realise profits in your target zone , then the idea is to realise it and exit the trade and then re enter it , so the crux is to realise profits while you stay delta neutral . i am a rookie but this made sense.
baiju thomas but then you’re not perfectly hedged (S+P is not a good mirror of your stock u like). The point in delta hedging is that the investor doesn’t want that exposure to risk, hence hedging
Really enjoyed this video - I'm new to the topic so wanted clarification on the numbers calculated @8:08. At the lowest point, the stock drops by around $25. You correctly show a loss of ~$12500 (500 * 25) for the long position but show an increase of over $8000 on the Puts. How did you calculate the Puts? It looks like you calculated based on the Net Delta Position (325 * 25) as opposed to the Position Delta of the Put (175 * 25)???
@6:25 Why would you only hedge half of the position ie why not go long 3700 shares and sell an extremely far, long dated out of the money call? If you do so, your net delta would be zero (delta neutral) but you would make a gain from time decay, that way you are risking nothing, but still profiting.
To neutralize +3700 deltas (or even half that), I'd need to sell way more call options than the 3,700 shares can "cover." Especially if I'm selling far OTM options, say a call option with a delta of 0.10, I'd need to sell 370 call options to neutralize +3700 deltas from the shares. If I sell 370 call options against 3700 shares of stock, I'd have 333 uncovered/naked short call options, in which case my upside risk (and also my margin requirement) would increase by a massive amount. There are unlimited ways to hedge a long/short stock/option position. For the purposes of this video, I wanted to keep things very simple to explain the general concept without discussing the many approaches that could be used to delta hedge a position. -Chris
Is delta hedging necessary for a portfolio with only credit spreads or any other defined risk set ups? Would going long VIX while keeping other bullish trades on be reasonable?
You can use either, but using stock is "cleaner" because shares of stock have static deltas -- they don't change when the stock price changes like options. If you short 50 shares of stock, you'll have -50 delta from the stock position no matter what the share price does. If you short an ATM call to get -50 delta, the stock could go higher and your delta might now be -75, or the stock could go lower and your delta might be -25 from the call position.
No, a 0 delta position only matters in that moment. As the stock price changes, as implied volatility changes, and as time passes, the delta value of the put will change, and therefore the overall position will end up becoming directional. Option deltas are dynamic (they change) while stock deltas are static (+1 delta for each share, -1 delta for each short share).
@@projectfinance correct me if i'm wrong but if you are buying or selling strangles you would want to be delta natural but you would either be long or short vega which would change in value and make you money. Basically you can profit even if you hedge yourself to have no directional exposure but you can still have exposure to implied volatility through vega.
@@saterdee3288 You are correct. Dynamically delta hedging strips out the directional risk and leaves you with volatility exposure. Your profitability will depend on how volatile the stock movements end up being and how often you have to adjust the hedge.
A short stock position is when you sell the shares without owning them. The idea is to sell the shares and buy them back at a lower price (sell high, buy low). Long stock is a normal stock purchase. The idea is to sell the shares at a higher price (buy low, sell high). To short a stock, you'll need a margin account and short stock privileges at your brokerage firm.
Good question and point. You can easily do that. The video teaches the concept of how it works if you wanted to use it. Delta hedging is more of an institutional strategy than retail trading strategy.
Hey Chris, Thanks for another great lesson. I am testing a hedging strategy on TOS to see how it works. At what point during an open position would you consider adding a hedge?
Hmm.. it's an interesting question but the answer is that it depends on the trader. I typically don't hedge positions. I enter the positions and then take them off at a profit/loss depending on the reason that made me close the trade. If you saw my ZM trade video, that would be considered a hedge when I shorted the 195 calls. I did that because the 180 calls I owned expired that same day, and if ZM traded lower (which it eventually did), I would have lost all my unrealized profits and my initial $340 outlay as well (total loss). By shorting the calls against the ones I owned, I eliminated the potential for me to lose my initial outlay while still allowing the stock price to increase further, generating more profits for me. But other than that, I don't really hedge. I like to keep things pretty simple, but I have this video on my channel to explain the concept for those interested in using it at some point!
@@projectfinance gotcha. I see why that makes sense. I did watch the ZM video and was impressed to know something like what you managed to pull off is possible. Thanks for your reply!
Maybe I'm missing something, but if you're going to hedge to try and reduce your losses by 50%, why not just buy half the amount of stock because you're only going to make 50% of whatever profit you make anyways. Why go through all of this trouble?
Keep delta neutral is in order to hedge the direction risk which humans are not good at guessing the price direction. After we doing this, we can purely trade the volatility which is more easier than guessing the direction.
I wouldn't necessarily hedge a single position. However, I would look at making sure my entire portfolio is not overly bullish/bearish. That's where, in my limited experience, delta neutrality can help.
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✅ New to options trading? Master the essential options trading concepts with the FREE Options Trading for Beginners PDF and email course: geni.us/options-trading-pdf
Hey I signed up with your referral, do you still offer the course you mentioned when doing so ?
@@javonbeforethejourney Thank you and yes! Send me an email via www.projectoption.com/contact-us/
Level II candidate here. This is fantastic.
Thank you so much. The whole series of videos has been nothing short of spectacular. Clear and to the point.
Awesome clinic thank you for the valuable information
Thanks for your video on explaining Hedging, Chris. Really helpfull.
You have not included the theta decay into consideration in case of option buying.
Thank you very much, you've solved all my confusions
God bless you
very helpful and clear!
Is there an advantage to hedging half your delta exposure on long stock with long puts vs simply owning half the shares?
Yes, in general if you expect the stock to be more volatile it makes sense to hedge with puts. Because you get to keep all your shares if there is a big move up. On the flip side if there is a big move down the delta will increase on the puts as they get further into the money. If you look at any option chain, the deeper in the money options have the highest delta. that will work in your favor if the stock moves volatily. So it usually makes the most sense to hedge with puts when you expect big moves, And sell shares if you expect a slow fall. But you also have to factor in option price which is another paragraph I would have to type out
@@chocomoan98 where can I find more info on this? Great explanation
@@jeffe.8756 I'm not really sure where you can find more information on this to be honest. Maybe try googling option hedging? Most of what I know is just from trial and error, watching option behavior, and some miscellaneous research. I watched and researched options for like a year and a half before I ever made any trades on them. If you have any questions feel free to ask me. I like explaining these kind of things, it's helpful for myself to look at my own thought processes and typing it out helps me do that
Great explanation. Thank you
Thank you! I just spent a ton of time creating an Options Trading for Beginners PDF (170+ pages now) that includes my best explanations/visuals explaining key options trading concepts and strategies. Check it out: www.dropbox.com/scl/fi/g7d402wnapqexq344ct73/options-trading-for-beginners-aug15-v1.pdf?rlkey=dort61xyaz1rubndbwbqmhd5i&dl=0
If you want updates to the PDF over the coming months/additional learning resources, consider dropping your email on the page here: geni.us/options-trading-pdf
Thank you
Curious - a delta neutral position would be 0 - what is the benefit in that? If your delta position were to be 0, how do you profit with the movement of the stock price? From other extrinsic factors (IV, time decay [if you are selling premium])? I can only see this as a benefit perhaps on the short side. Or because delta changes so much, you are trying to get as close to 0 as possible to mitigate a big move knowing that delta will change - in other words, hedging the a big movement in delta. Not sure if this question makes sense.
Mahmoud,
Delta-neutral positions typically benefit from time decay (the decrease in an option's extrinsic value as time passes), which is only applicable to short premium trades (as you've mentioned).
However, other delta-neutral trading strategies include gamma scalping (a good read on this topic here: www.randomwalktrading.com/practical-gamma-scalping/).
I hope this helps!
-Chris
had the exact same Q , if you are delta neutral , how do you make money . for example if you are bullish on a stock and sell put options , the way to hedge its delta is to go bearish on SPY and may be do a short call . so if the mkt turns either direction you are loosing on one while gaining on the other keeping it no profit no loss situation .from ive tried to find out , my understanding is if the mkt turns in either directions and you realise profits in your target zone , then the idea is to realise it and exit the trade and then re enter it , so the crux is to realise profits while you stay delta neutral . i am a rookie but this made sense.
baiju thomas but then you’re not perfectly hedged (S+P is not a good mirror of your stock u like).
The point in delta hedging is that the investor doesn’t want that exposure to risk, hence hedging
@@vp922can you please elaborate this? 😮😊
Really enjoyed this video - I'm new to the topic so wanted clarification on the numbers calculated @8:08. At the lowest point, the stock drops by around $25. You correctly show a loss of ~$12500 (500 * 25) for the long position but show an increase of over $8000 on the Puts. How did you calculate the Puts? It looks like you calculated based on the Net Delta Position (325 * 25) as opposed to the Position Delta of the Put (175 * 25)???
So if we are fully hedged.. What money do the trader make if he is short calls? Is it the premiums?
What are Premiums?
Great Video. Thank you!
Nice presentation. Easy to understand.
Thank you!
@6:25 Why would you only hedge half of the position ie why not go long 3700 shares and sell an extremely far, long dated out of the money call? If you do so, your net delta would be zero (delta neutral) but you would make a gain from time decay, that way you are risking nothing, but still profiting.
To neutralize +3700 deltas (or even half that), I'd need to sell way more call options than the 3,700 shares can "cover." Especially if I'm selling far OTM options, say a call option with a delta of 0.10, I'd need to sell 370 call options to neutralize +3700 deltas from the shares.
If I sell 370 call options against 3700 shares of stock, I'd have 333 uncovered/naked short call options, in which case my upside risk (and also my margin requirement) would increase by a massive amount.
There are unlimited ways to hedge a long/short stock/option position. For the purposes of this video, I wanted to keep things very simple to explain the general concept without discussing the many approaches that could be used to delta hedge a position.
-Chris
thanks for these clarifications !
You're welcome, Salim!
hi, i m from india & want to start delta in american market...what should i do...
Hi. I don’t know or I’d tell you! 😂👍🏽
Is delta hedging necessary for a portfolio with only credit spreads or any other defined risk set ups? Would going long VIX while keeping other bullish trades on be reasonable?
As Stanley Drukenmiller, I tell you it is not a good idea AT ALL to trade VIX options or futures.
Great video. Congrats.
Thank you!
Excellent introduction video!
Thanks!
Do you hedge using a stock or an option in delta-hedging or both?
You can use either, but using stock is "cleaner" because shares of stock have static deltas -- they don't change when the stock price changes like options. If you short 50 shares of stock, you'll have -50 delta from the stock position no matter what the share price does. If you short an ATM call to get -50 delta, the stock could go higher and your delta might now be -75, or the stock could go lower and your delta might be -25 from the call position.
Excellent, very clearly explained
Very good knolodge who does not know about stock market
What am I missing? I would appreciate specific and constructive feedback if there's something I've completely overlooked.
projectoption I think he’s saying “very good knowledge for those who do not know about stock markets”
If you hold net 0 delta through a combination of longs and puts, will you always end up with a $0 profit at the expiration of the puts?
No, a 0 delta position only matters in that moment. As the stock price changes, as implied volatility changes, and as time passes, the delta value of the put will change, and therefore the overall position will end up becoming directional. Option deltas are dynamic (they change) while stock deltas are static (+1 delta for each share, -1 delta for each short share).
@@projectfinance correct me if i'm wrong but if you are buying or selling strangles you would want to be delta natural but you would either be long or short vega which would change in value and make you money. Basically you can profit even if you hedge yourself to have no directional exposure but you can still have exposure to implied volatility through vega.
@@saterdee3288 You are correct. Dynamically delta hedging strips out the directional risk and leaves you with volatility exposure. Your profitability will depend on how volatile the stock movements end up being and how often you have to adjust the hedge.
awesome expiation
thank you!
Im confused-What is a Short Stock.Long Stock? how can you enter a short stock (or is this when the stock is already losing money)
A short stock position is when you sell the shares without owning them. The idea is to sell the shares and buy them back at a lower price (sell high, buy low).
Long stock is a normal stock purchase. The idea is to sell the shares at a higher price (buy low, sell high).
To short a stock, you'll need a margin account and short stock privileges at your brokerage firm.
projectoption Thank you!!! I really confused myself :)
Why would one hedge their delta instead of just taking a smaller position size to begin with?
Good question and point. You can easily do that. The video teaches the concept of how it works if you wanted to use it. Delta hedging is more of an institutional strategy than retail trading strategy.
Good one, liked it!
Thanks for the comment! Glad you liked it.
Thank you!
You're welcome!
Hey Chris, Thanks for another great lesson. I am testing a hedging strategy on TOS to see how it works. At what point during an open position would you consider adding a hedge?
Hmm.. it's an interesting question but the answer is that it depends on the trader. I typically don't hedge positions. I enter the positions and then take them off at a profit/loss depending on the reason that made me close the trade. If you saw my ZM trade video, that would be considered a hedge when I shorted the 195 calls. I did that because the 180 calls I owned expired that same day, and if ZM traded lower (which it eventually did), I would have lost all my unrealized profits and my initial $340 outlay as well (total loss). By shorting the calls against the ones I owned, I eliminated the potential for me to lose my initial outlay while still allowing the stock price to increase further, generating more profits for me.
But other than that, I don't really hedge. I like to keep things pretty simple, but I have this video on my channel to explain the concept for those interested in using it at some point!
@@projectfinance gotcha. I see why that makes sense. I did watch the ZM video and was impressed to know something like what you managed to pull off is possible. Thanks for your reply!
you forgot to mention that the only reason to delta hedge - if you sold option
Maybe I'm missing something, but if you're going to hedge to try and reduce your losses by 50%, why not just buy half the amount of stock because you're only going to make 50% of whatever profit you make anyways. Why go through all of this trouble?
You can do that for sure! Smaller position sizes negates the need to hedge. The video was explaining how hedging works if someone wants to.
so if my postion is 3700 and i hedge 50% my loss is half
so why not cut my postion size into half and not hedge? same shit! haha
But WHYYY
Hedging is pointless. Just buy fewer shares or use a spread.
100% agreed.
Keep delta neutral is in order to hedge the direction risk which humans are not good at guessing the price direction. After we doing this, we can purely trade the volatility which is more easier than guessing the direction.
Or you can short the position by earning the premium, but all are base on delta neutral.
I wouldn't necessarily hedge a single position. However, I would look at making sure my entire portfolio is not overly bullish/bearish. That's where, in my limited experience, delta neutrality can help.
There are hundreds of situations where it can be profitable, useful, tax efficient etc. Know it, and if needed, use it.
Loss...Loss...Loss..hedging=less loss
Why do this?
This is quite confusing
you make this so complicated to many moving parts for me
If you want reduce your position size. This is for you. I understand thatconcept (My english is bad sorry I hope explain)
Reduce loss and profit
This is an extremely simplified explanation that neglects many other factors you have to account for which you must consider.
good grief - how the heck do you know all this stuff?
Hilarious that both examples where massive investment failures 😂
ddddddd