Delta adjustments are a crucial technique used in options trading to manage the directional exposure of a strategy. Since options prices are sensitive to the underlying asset's price movements, delta helps us understand this sensitivity and make adjustments to maintain a desired level of risk.
Here's a breakdown of delta adjustments:
Understanding Delta:
Delta represents the rate of change in an option's price relative to a change in the underlying asset's price.
It ranges from -1 (put options) to +1 (call options).
A delta of 0.5 for a call means the option's price increases by roughly 50 paisa for every ₹1 increase in the underlying asset's price (assuming other factors remain constant).
Why Use Delta Adjustments?
Maintain Neutrality: Many strategies aim for delta neutrality, meaning the overall delta of the position is close to zero. This protects against significant losses from unexpected price movements in the underlying asset.
Manage Risk: By adjusting delta, you can fine-tune your strategy's directional bias. If the market moves against your initial expectation, adjustments can help limit potential losses.
Capture Opportunities: Delta adjustments allow you to exploit changing market conditions. For example, if the underlying asset becomes more volatile (delta increases), you might adjust to capture higher premiums.
How Delta Adjustments Work:
Consider a short strangle strategy, where you sell both a call and a put option at different strike prices. Initially, the net delta might be close to zero. However, as the underlying asset's price moves:
Price Increase: The call option's delta decreases (becomes less sensitive), while the put option's delta increases (becomes more sensitive). The net delta becomes negative, indicating a directional bias towards a price decline.
Price Decrease: The call option's delta increases (becomes more sensitive), while the put option's delta decreases (becomes less sensitive). The net delta becomes positive, indicating a directional bias towards a price increase.
Making Adjustments:
To maintain delta neutrality or adjust your directional bias, you can:
Add or Remove Options: Sell additional options (calls if the net delta is negative, puts if positive) to bring the net delta closer to zero. Conversely, you can buy back previously sold options to reduce the overall delta exposure.
Adjust Strike Prices: Roll your options contracts to strikes with different deltas. For instance, if the underlying price increases, you might roll your short call to a higher strike price (reducing its delta).
Important Considerations:
Delta adjustments require monitoring market movements and understanding the impact on your strategy's delta.
Here is the video in TAMIL which explains Greeks, Delta Adjustments
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