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Delta Hedging Calculator to Calculate Delta Value Using Delta Neutral Formula and Constructing Delta hedging Portfolio
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Delta of your position is calculated by delta hedging calculator. It calculates the delta so that you get to know about the exact number of options contracts that need to be bought/ sold to achieve hedging. Delta hedging formula used for calculate delta value
What are the Delta Hedging Formula and Delta Hedging Calculator ?
Options traders use the value of delta to identify how many options contracts are needed to hedge a long or short position in the underlying asset. This value of delta is calculated by delta hedging calculator. This calculator uses the delta hedging formula in which the delta of the portfolio is calculated by taking the summation of deltas of individual options.
For example, you have the following options in your portfolio:
Two long ITM calls with a delta of 0.70, one short OTM call with a delta of 0.40, and one Long OTM put with a delta of -0.30. Now according to the delta hedging formula, the total delta of your position in the delta hedging calculator will be,
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2 x 0.70 = 1.4 {for 2 long calls}
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(- 0.40) {minus because the contract is being short}
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plus (-0.30) {plus because option contract, but the delta is negative because it is a put option}
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Total delta = 1.40 - 0.40- 0.30 = 0.70
Here the meaning of a positive 0.70 delta means that the portfolio value is expected to increase by approximately 70 rupees for every 1 rupee of the underlying stock's price increase. (Here contract size is assumed to be 100 shares). Above delta hedging formula will be used while calculate delta.
What are the Delta Neutral Formula and Delta Neutral Calculator ?
In Delta Neutral strategy the sum of your deltas is equal to zero. The delta neutral formula is based on this concept. Delta neutral calculator is nothing but the delta hedging calculator which calculates the value of delta. This trading approach is used by most successful traders. This feature gives the values of delta and various options parameters like volatility, expiry, etc. For example, you buy 10 call options, each having a delta of 0.60, and buy 20 put options having a delta of -0.30 then according to the delta neutral formula the delta neutral calculator will show the following result.
Constructing Delta Hedging Portfolio Using Delta Neutral Calculator and Formula
In order to achieve delta neutral in your portfolio, if you buy the underlying and buy put options then:
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You have a profit on the underlying and you have a smaller loss on the options when the market goes up because here the value of delta decreases and overall you will be in the profit.
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You have a loss on the underlying but you have a bigger profit on the options when the market goes down because here the value of delta increased and again you will be in the profit. All this calculation will be done by delta hedging calculator.
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This way delta hedging portfolio can be constructed if you buy the underlying and put option
In order to achieve delta neutral if you sell (short) the underlying and buy call options then:
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You have a loss on the underlying but again you have a bigger profit on the options when the market goes up as here the value of delta increased and overall you have a net profit.
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You have a profit on the underlying but you have a smaller loss on the options when the market goes down as here the value of delta decreased and you still have a net profit.
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This way you can construct a profitable delta hedging portfolio by shorting the underlying and buying the call option.
While constructing a delta hedging portfolio using delta hedging calculator remember one thing, always try to initiate the position with delta neutral. That means start position when a total position delta is zero or as close to zero as possible.
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