What is delta hedging?

What is delta hedging?

Approach: Explain concept of neutralizing price risk of option.

Strategy to hedge price risk of an option by holding offsetting position in underlying asset. Number of shares = -Δ, where Δ = ∂V/∂S is option delta. Makes portfolio delta-neutral.

Follow-up: Why does delta hedging need to be dynamic?

Key concepts: delta, hedge ratio, portfolio immunization.