Hedge Ratio Formula Question

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CFA.Rhythm

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Are there two ways to compute the hedge ratio?
1) 1/delta
2) C+ - C- / S+ - S-
is that correct?
 
Delta is the number of shares to hold for each short option so 1/delta is the number of options per share.
The formula is simply delta in the binomial model i.e.change in option value over change in underlying.
 
Hold on a sec, without taking into account the positive/negative convention, isn’t the hedge ratio simply delta?
e.g. If I own 100 calls (1 share per call) and the delta is .85, I would need to short 85 shares in order to hedge my position.
 
That’s how I understand it. And if you own 100 puts and delta was the same (negative obviously) then you’d need to buy 85 shares to hedge your position.
 
bpdulog Wrote:
——————————————————-
> Hold on a sec, without taking into account the
> positive/negative convention, isn’t the hedge
> ratio simply delta?
>
> e.g. If I own 100 calls (1 share per call) and the
> delta is .85, I would need to short 85 shares in
> order to hedge my position.
A delta of 0.85 means you should short 85 calls to hedge for 100 shares; so you wrote just the opposite.
 
To put it together.
schweser sample exam, book 7 exam 1, #109
which of the following positions will best delta hedge Nolte’s long position?
He owns 5,000 shares, the delta for the 1 month calls is .54
we are given the delta, and we have to compute the hedge ratio
hedge ratio tells us # of calls (per share) to short
hedge ratio = 1/delta = 1.54 = 1.851
answer: sell 9259 calls
 
same thing pretty much. Usually you are hedging a stock position (as opposed to hedging an option position), so the hedge ratio is shares/delta.
in your examply, stock moves up $1 you lose 85 on the stock and make 85 on the call
if i am short 85 shares in stock, i would need 85/.85 = 100 calls
 
is revisor correct? I thought the delta shows how many units of the underlying asset you would need to buy/short for every option.
 
shares owned/delta = hedge ratio, or so i thought. Represents the # of short calls necessary to eliminate the exposure to change in the asset price…
 
CFA.Rhythm Wrote:
——————————————————-
> To put it together.
>
> schweser sample exam, book 7 exam 1, #109
>
> which of the following positions will best delta
> hedge Nolte’s long position?
>
> He owns 5,000 shares, the delta for the 1 month
> calls is .54
>
> we are given the delta, and we have to compute the
> hedge ratio
>
> hedge ratio tells us # of calls (per share) to
> short
>
> hedge ratio = 1/delta = 1.54 = 1.851
>
> answer: sell 9259 calls
I assume the answer is simply inverse if you are a dealer selling calls looking to hedge?
#calls x delta
 
The way I see it, the # of calls can never exceed the # of shares of stock. At the most, the # of shares will equal the # of calls assuming a delta of 1.
 
Bpdulgo^^
Isnt it the opposite?
I will always need more short calls to hedge a share position, unless delta is 1, in whcih case the numbers are equal.
Upper delta limit on calls is 1. so I always need more calls than share to hedge.
 
bpdulog Wrote:
——————————————————-
> The way I see it, the # of calls can never exceed
> the # of shares of stock. At the most, the # of
> shares will equal the # of calls assuming a delta
> of 1.
yeah, i think you’re off on this…hedge ratio is shares/delta.
When delta = 1, #calls = # shares.
All other times, calls > shares needed
 
Yeah, you’re right, I meant the opposite:
# of shares < # of calls
Unless delta = 1
# of shares = # of calls
 
# calls for a delta hedge =
# shares of stock / delta of call option
 
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