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YouTube T4-14: Dynamic option delta hedge

Nicole Seaman

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To dynamically delta hedge is to rebalance the hedged position when the stock price moves (and therefore its delta moves, also). In this example, we rebalance once per week. We assume you are the market maker who writes (that is, sells) 100,000 call options where each option has a delta of 0.522. The initial position delta is therefore -100,000 * 0.522 = -52,000; as naked options you will lose 52,000 for each +$1.00 increase in the stock price. To delta hedge (aka, neutralize delta), you purchase 52,000. Then next week, you buy/sell shares to maintain delta neutrality, hence the "dynamic" aspect. If the realized volatility equals the implied volatility, then the cost of the hedge will approximately equal the option premium!

David's XLS is here: https://trtl.bz/2X8LpoV


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