Delta Hedging Strategy

Delta hedging is a risk management strategy used by options traders to neutralize the directional risk of their positions. The delta of an option measures its sensitivity to changes in the price of the underlying asset.

By taking an offsetting position in the underlying asset ⎊ such as buying or selling spot crypto ⎊ the trader can ensure that their total portfolio delta is zero. This makes the portfolio immune to small price movements in the underlying asset, allowing the trader to profit from other factors like volatility changes or time decay.

This strategy requires continuous monitoring and frequent rebalancing as the delta changes with the underlying price and time. It is the fundamental mechanism that allows market makers to offer options without taking on excessive directional risk.