Calculation Delta Hedge

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Cook2014

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To calculate the number of options used in a delta hedge, the general formula is delta = number options/number shares. In some cases, Schweser use 1/delta = number options/number shares.
Is there someone who can explain me when I have to use delta and when 1/delta?
Thanks in advance!
 
i believe something in wrong with your first formula
Number of shares = delta x number of options.
 
There are times when you use 1/delta:
If you have a $5million position in bonds, and want to hedge against loss, you should buy puts on the bond. This is a case where you multiply delta* (portfolio/contract size)
However, if you wanted to hedge using CALLS, you would have to sell the calls. In this case you would use 1/delta * (portfolio/contract size)
See Schweser exam book 2, mock 2, question 43 afternoon session
 
His mom wrote:If you have a $5million position in bonds, and want to hedge against loss, you should buy puts on the bond. This is a case where you multiply delta* (portfolio/contract size)
Click to expand...
I’m pretty sure that multiplying by delta is incorrect here.
 
S2000magician wrote:
I’m pretty sure that multiplying by delta is incorrect here.
Click to expand...
Oh no! do we always use 1/delta? thanks S2000 for your work on this forum
 
Basically it’s just this:
To hedge for 1% or 10 basis point.
Delta*Value of Option*#of option = Portfolio
Delta = change in option price/change in underlining. Change in underlining is it’s duration. So If delta =.3333 and duration is 3, option will only go up by 1 duration .
# option = Portfolio/(Delta*Value of Option).
 
Is there no general rule when to use number stock = delta * number option and when number stocks = 1/delta * number options?
 
# of options is always >= # of stocks/bonds
This is because option delta is <-1;+1>
 
Number of call / number of stocks = 1 / delta ..
to get number of stocks you multiply i guess.. that’s what i can get this one.
 
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