Can you explain how a delta hedge works in practice? (e.g; if an investor own shares, how does selling call options and but them back later actually hedge the risk of a potential decline in the market value of share?)
I am trying to explain this and John will also add value to it or correct me as well..
When we hedge for specific amount of investment in form of contracts…delta hedge tell how many contracts should investor hold/sell for each movement in share price share price may be favorable or unfavorable there is formula for that “d1″ that will tell us number of contracts to hold and sell others or even buy more.
If share price falls value of call also falls so investor is better off to sale now and buy back at profit.
aqadirchaikh is correct.
As the share price fall, so the price of call options will fall as well. So if you sell the right number of call options (and buy back later) the profit on the options will ‘cancel’ the loss made on the shares.
Have you watched my lecture on this?
Besides, you also can buy put option, but need to change to N(-d1). Eg Dec10 q3
That is true!
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