Delta Hedging

Delta hedging is a risk management technique used by options traders and market makers to neutralise the directional price risk of an options position by taking an offsetting position in the underlying asset. The delta of an option measures how much its price changes for a one-point move in the underlying. A delta-neutral portfolio is constructed so that gains and losses from the options and the underlying cancel each other out for small price movements. Because delta itself changes as the underlying price moves (this change is measured by gamma), delta hedges must be continuously rebalanced—a process known as dynamic hedging. In India, institutional options traders and market makers on Nifty and Bank Nifty use delta hedging to manage directional exposure while retaining other risk exposures like volatility.