Hedge

Hedge Ratio

It compares the value of a position protected through hedging with the size of the entire position.

Quite straightforward, imagine you hold $10,000 in BTC and hedge $5,000 worth of the position, your hedge ratio is 0.5 ($5,000 / $10,000). This means that 50% of your BTC investment is sheltered from the price change of BTC.

Delta Hedging

It aims to reduce the directional risk associated with price movements in the underlying asset. The most common type of delta hedging is to buy or sell options, and then offset the delta risk by buying or selling an equivalent amount of the same underlying.

For example, suppose you own 0.01BTC and the underlying delta is 1, your current position has a delta of +0.01 (0.01 x 1). To obtain a delta-neutral position, you need to sell deltas to reduce the risk. Assume that you find a put option with a delta of -0.5, you could purchase (long) 0.02 of these put options. which would have a total delta of -0.01 (-0.5 x 0.02). With the combination of 0.01BTC and 0.02 long put options, your overall position reaches delta neutral. This strategy is called Protective put.

In addition, delta hedging strategy could be built by combining options itself without involving in holding underlying assets.

Assume you hold one call option with a delta of +0.50, and wish to maintain a delta neutral position. You can purchase another put option with a delta of -0.50 to offset the positive delta, making the position have a delta of zero.