Delta hedging

In finance, delta neutral describes a portfolio of related financial securities, in which the portfolio value remains unchanged when small changes occur in the value of the underlying security. Such a portfolio typically contains options and their corresponding underlying securities such that positive and negative delta components offset, resulting in the portfolio's value being relatively insensitive to changes in the value of the underlying security.

A related term, delta hedging is the process of setting or keeping the delta of a portfolio as close to zero as possible. In practice, maintaining a zero delta is very complex because there are risks associated with re-hedging on large movements in the underlying stock's price, and research indicates portfolios tend to have lower cash flows if re-hedged too frequently.

${\displaystyle \Delta }$ The sensitivity of an option's value to a change in the underlying stock's price.

${\displaystyle V_{0}}$ The initial value of the option.

${\displaystyle V}$ The current value of the option.

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