This option trading mini-game tests your ability to determine the correct delta hedge for a simple options trade. Practise this mini-game so that when you want to delta hedge in the real market, you will know which way to trade (buy or sell) and the correct quantity.
Let’s work through an example.
Where does this come from? Well, think of an option that has a 50% delta. If we trade 100 lots of this option, then its value changes by ½ a tick, for every full tick change in the price of the underlying. So we delta hedge with 0.50 * 100 lots. But we also need to consider the contract multiplier. If each option gives the right to buy or sell 1000 lots of the underlying, then we need to multiply our delta hedge by this amount. In this case, one option is like owning or being short not ½ of a contract in the underlying but 500 lots of the underlying! So we need to adjust for the multiplier.
In this case therefore:
So, we have our answer to this question. We need to sell 1,560 lots of the underlying to delta hedge the option trade.
Want to practise delta hedging?
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