Delta hedging - GetProfitable

A market maker who sells you a call is short delta and does not want the directional risk, so they buy shares against it. As the option's delta changes, the share hedge must change too — this rebalancing is the mechanical link between the options market and flows in the stock itself.

For a trader, delta hedging converts an options position into a pure bet on volatility. Sell an expensive straddle, hedge the delta continuously, and your profit or loss depends on whether realized-volatility comes in below the implied-volatility you sold, not on where the stock goes.

Example: you are short one XYZ $50 call with 0.52 delta, so short 52 share-equivalents. Buy 52 shares and the position is flat. XYZ rises to $52 and the delta becomes 0.64, so buy 12 more. Each rebalance locks in a small loss because you are always buying higher — that is negative gamma in cash form.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Delta across the range of prices. Delta says how much a call's price moves for a one-point move in the stock. Far below the strike it is near 0 and the option barely reacts; at the strike it is about 0.50; far above it approaches 1 and tracks the stock.

Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.