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Hi,
I just watched the delta hedge lecture video and I had a doubt regarding my understanding of shares and options.
In the video Chp 13 Ex 6 is used to explain delta hedge. So in that particular example Nd1 =0.25 So if the shareholder (Martin) had 1000 shares and the price of the shares went down by $1, to protect himself against the loss he would have to sell 4000 call options and buy them back later.
My doubt here is whether Martin will buy call options later or shares later. My understanding was that it was call options but I got confused with the discussion of an options dealer and him having to buy shares to hedge against the call options sold.
If the shareholder owns shares, then he is worried about the price falling.
So…he sells call options now and buys them back later. If the share price falls then the price of the call options will fall as well and so he will make a compensating profit on the call options.Forget the bit about options dealers. In the exam it is always someone who owns shares and so sells call options for the reasons I have written above. In the lecture, I was just making the point that in real life it is options dealers who are more likely to create delta hedges. However the examiner does not test that.
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