Why do we delta hedge in Volcube?

In Volcube games, you take on the role of an options market maker and trader. This means you will be buying and selling options, trying to manage the risk you accrue and make a profit from your trading activities. Now, when you buy or sell an option, your risk is always that the option’s value will change. If you buy options, your risk is that the value falls, whereas if you sell options, your risk is that they rise in value. Several different factors can serve to change the value of an option. The most pressing of these when you trade is the ‘delta risk’. This refers to the risk to your option’s value owing to a change in the price of the underlying product. If the underlying product price changes, your option’s value is likely to change. This is one risk we can eliminate quite simply, by delta hedging¬†with the underlying product. Once this is done, the immediate risk to our option’s value owing to a change in the price of the underlying, will vanish. There is a useful video here showing you exactly how to execute a delta hedge in Volcube. And remember that in the early Levels of your Volcube games, Volcube will automatically delta-hedge for you. In Custom Play games, you can choose to switch off the auto-hedge so you can practise delta hedging for yourself.

One final note. By eliminating the delta risk, what risk is left? The principle risks are that implied volatility will alter (vega risk), time decay (theta risk) and the risk that our delta hedge becomes inappropriate in a bad way (i.e. gamma). But by delta hedging, we eliminate the most pressing risk and turn our option trade’s profile from being a largely directional trade into a volatility trade.

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