## 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 company’s condition in the Stock Market. It details the company’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 **.

**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 to 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**, 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** is **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**. **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
**10**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**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**

Download the workbook.

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