## What Is Delta Hedging?

In stock markets, delta hedging is used to lower the risk and maximize profit.

### Example 1- Calculate Delta Hedging Using Stocks in Excel

The dataset showcases a companyâ€™s condition in the Stock Market. It details the companyâ€™s option price and the underlying stock between the 1st and 31st of October 2022.

Calculate the delta based on the comparison between the 1st and 31st of October:

**Delta** is the ratio of the difference between the **Option Price **and the **Underlying Stock **.

**Delta Hedging** is a trading strategy to reduce directional risk.

**STEPS:**

- Use the following format to show Options and Underlying Stocks.
- For
**Option 1**, the starting and the final values of Option and Underlying Stock were entered. - Click
**C8**cell and use the following formula in the formula bar to calculate the**Delta**:

`=(C5-C4)/(C7-C6)`

- Press
**Enter**to see the result.

This formula indicates** (Final- Initial Option Value)/ (Final-Initial Underlying Value)**.

- Enter information for
**Option 2.** - Here, the starting and the final values of Option and Underlying Stock.
- Calculate the
**Delta**for**Option 2:**

- Click
**C16**cell and enter the following formula:

`=(C13-C12)/(C15-C14)`

- Press
**Enter**to see the result.

To calculate the overall **Delta** for the company:

- Sum the
**Delta**values. - Select
**C17**cell and use the following formula:

`=C9+C16`

- Press
**Enter**.

To calculate the number of stocks you need to buy or sell:

- Select
**C17**and enter the following formula:

`=C17*100`

- Press
**Enter**to exit the editing mode and see the result.

For **US **stock options: **1 option contract** = **100 shares**. **1 **unit **Delta **means **100 shares **or **stocks**. The number of **stocks **will be a multiplication of **Delta** by **100**.

- For Delta Hedging, you need to sell your stocks if
**Delta**is positive. - After selling these stocks the resultant
**Delta**will be**0**. - You need to buy the calculated amounts of stocks if
**Delta**is negative. - Enter the following formula in
**D19**:

`=IF(C17>0,"Sale","Buy")`

The **IF function** determines if the value of **C17** is positive or negative. If the value of the cell is greater than **0**, it will return Sale. Otherwise, Buy.

### Example 2 – Applying Options for Delta Hedging in Excel

If the resultant **Delta** is **0.6**, you have to buy contracts with **-0.6**. If the resultant **Delta** is **-0.6**, you have to buy contracts of **+0.6**.

**STEPS:**

- The previous dataset was used.
- In
**Option 1**, information is unchanged. - In
**Option 2**,Â information was slightly changed.

To recalculate the value of **Delta** for **Option 2:**

- Enter the following formula in
**C16**:

`=(C13-C12)/(C15-C14)`

- Press
**Enter**to see the value.

To calculate the total **Delta** for your company:

- Enter the following formula in
**C17**:

`=C9+C16`

- Press
**Enter**.

The Delta value is calculated.

To buy a contract with **-0.2,** so that the resultant **Delta** isÂ **0:**

- Enter the following formula in
**C19**:

`=C17*100/(200/100)`

- Press
**Enter**to see the result.

For **US **stock options, **1 option contract** = **100 shares**.Â **1 **unit **Delta **means **100 shares **or **stocks**. **0.2** means **0.2*****100**=**20** shares. Divide the share by total option value. For the **2** options, the total **Option **value is **200**. The result is **20**/**2**=**10**, which indicates **Contracts**.

### Example 3 – Manage and Adjust Delta Hedging

**STEPS:**

- This is the dataset.
- For Delta Hedging, you need to buy
**10Â**contracts.

**Opinion 1**changes rapidly.- The Delta value of
**Option 1**will be**13**. - The Final Value of the Option was supposed to be $120.
- But the Final value of the Option changes to $170.
- As a result, the value of Delta is changed to
**0.3**. - The value of
**Option 2**is unchanged. - The total Delta value is now
**0.37**.

Calculate the actions needed:

- Enter the following formula in
**F16**:

`=F14*100/(200/100)-C19`

- Press
**Enter**.

For **US **stock options, **1 option contract**=**100 shares**. **1 **unit **Delta **means **100 shares **or **stocks**. **0.37** means **0.37*****100**=**37** shares. Divide the share by the total option value. For the **2** options, the total **Option **value is **200**. The result is **37**/**2**=**18.5~19,** which indicates **Contracts**. It was planned to buy **10** contracts, you need to buy **19**–**10**=**9** contracts.

- If
**F16**Â is greater than**0**, it indicates that you need to buy. - You need to sell the contracts for Delta Hedging.
- Enter the following formula in
**G17**cell:

`=IF(F16>0,"Buy","Sale")`

- Press
**Enter**to see the result.

**Download Practice Workbook**

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